EUR 850.00 For Business Accounts Only

Morningstar | Avery's pressure-sensitive materials business is best in class but is not quite moatworthy.

Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged good penetration in emerging markets should add to label growth, while growth in omnichannel retailing will aid RFID sales at Avery Dennison.Avery sells pressure-sensitive materials to a highly fragmented customer base that converts its specialty film rolls into labels for companies such as Kraft Heinz or Amazon. The concentrated market positions of Avery and competitor UPM Reflactac give each bargaining power over their customers. The Labels and Graphics Materials, or LGM, and Industrial and Healthcare Materials, or IHM, segments account for roughly 75% of company revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is stagnant in developed markets, we expect Avery's large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.Avery's Retail Branding and Information Systems segment, or RBIS, makes up 25% of sales and produces a mixture of apparel graphics, product tags, and passive radio frequency identifiers or RFID. While RFID only comprises around 15% of the segment's revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery's RBIS segment. RFID products are typically integrated into product tags in industries which have both a diverse inventory and where UPC scanning is cumbersome or labor-intensive. We think Avery’s recent strategy shift to focus on reducing both costs and prices of the technology in order to gain share demonstrates the commoditized nature of these products. Even so, we think Avery will at least be able to grow with the market, or between 20% and 30% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags. We expect revenue growth of these end uses to remain mixed, dependent largely on shifting fashion preferences.