Morningstar | Avery's Labels Business Suffers Weaker Growth, Falling Margins in 1Q; Maintaining Our FVE
Avery announced an underwhelming start to 2019. While adjusted consolidated operating margin ticked higher to 10.9% from 10.6% last year, sales declined from the year prior on share losses in labels, and unfavorable currency affects. Although the retail branding segment grew and generated strong margins, performance in Avery's largest segment, label and graphic materials softened. We've slightly changed our assumptions for the year, and we maintain our $87 per share fair value estimate and no-moat rating.Following an extended streak of ever-higher margins and solid organic sales growth, Avery's label and graphics materials segment posted its slowest organic sales growth in over three years. Organic sales rose 1.4% versus the prior year, with commentary that suggests some share loss in Europe and possibly in parts of Asia. This was offset by increased product prices. Management called out competition in some of Avery's lower-value parts, but that seems in conflict with adjusted segment operating margins falling to 12.5% in the quarter versus 13% last year. We still think it's possible that Avery can both win back sales and lift margins through higher operating rates during the second half of 2019, which would make up for a weaker start to the year.
Part of the reason management didn't adjust annual guidance was an especially strong start for the retail branding business. Organic sales rose 7% in the quarter, driven by roughly 20% growth in its radio frequency ID business, which improves retailer inventory tracking. Margins were also solid. Adjusted segment operating margin reached 12.4%, the highest in segment history.
With shares currently trading well above our fair value estimate, we think the market is overestimating the full-cycle operating margins for Avery Dennison. We still lack conviction that the retail branding business will be able to support recent margins without facing in coming years material price competition that will compress margins.
Avery Dennison is engaged in the production of pressure-sensitive materials and a variety of tickets, tags, labels and other converted products. The company sells its pressure-sensitive materials to label printers and converters that convert the materials into labels and other products through embossing, printing, stamping and die-cutting. The company sells other pressure-sensitive materials in converted form as tapes and reflective sheeting. The company also manufactures and sells a variety of other converted products and items not involving pressure-sensitive components, such as fasteners, tickets, tags, radio-frequency identification inlays and tags, and imprinting equipment and related solutions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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