On Thursday, UBS adjusted its stance on Avery Dennison Corporation (NYSE:AVY) stock, a company specializing in adhesive manufacturing, from a "Buy" to a "Neutral" rating. The firm also reduced the price target for Avery Dennison shares from $262.00 to $235.00.
The revision follows concerns over the pace of growth in the company's radio-frequency identification (RFID) segment, which is now expected to be less robust than previously anticipated.
According to UBS, Avery Dennison's RFID growth is projected to slow later in the year due to delays in adoption and trials. While RFID growth remains strong, with a year-over-year increase in the high teens, the anticipated acceleration in organic growth through 2024 is unlikely to materialize as expected. This reassessment is partly due to the slower recovery of apparel volumes, which was initially thought to boost growth.
The firm also noted that the margins in the Solutions segment of Avery Dennison's business have been underperforming relative to expectations. This has prompted UBS to adjust its estimates, foreseeing slower RFID growth in the years 2024 and 2025, with projections now at 16% and 19% year-over-year growth, respectively, down from the previous estimates of 19% and 22%.
As a result of these adjustments, UBS has trimmed its 2025 earnings per share (EPS) estimate for Avery Dennison by approximately 3%, aligning it more closely with the consensus. The updated price target of $235.00 is based on a price-to-earnings (P/E) multiple of around 21 times and a free cash flow (FCF) yield of approximately 4%.
Despite the downgrade, UBS still expects Avery Dennison to experience above-average growth, with RFID anticipated to make up about 13% of the company's sales by 2025, compared to roughly 7% in the years 2020 and 2021.
In other recent news, Avery Dennison Corp reported robust second-quarter performance, surpassing earnings expectations with an earnings per share (EPS) of $2.42. As a result, the company raised its full-year earnings guidance to between $9.30 and $9.50 per share, indicating an approximately 20% growth over the previous year.
Following these developments, BMO Capital Markets adjusted its outlook on Avery Dennison, reducing its price target on the stock to $254 from the previous $256, while maintaining an Outperform rating. Truist Securities also adjusted its outlook, increasing the price target to $258 from $253, while reaffirming a Buy rating on the stock.
The revised earnings outlook is based on an anticipated organic sales growth of about 4-5%, and the company expects volume growth to be in the high single-digit percentage range year-over-year.
However, Avery Dennison anticipates a mid-single-digit percentage decline in Q3 EPS due to historical seasonal volume drops. Despite these challenges, the company expects record revenue in Q4 and targets over 20% volume growth in intelligent labels for the year.
The resilience of the Materials group, significant growth in the Solutions group, and confidence in the growth potential of their intelligent labels platform were highlighted. More insight into Avery Dennison's long-term strategies will be provided during the company's Investor Day in September. These recent developments indicate the company's ongoing efforts to maintain strong growth and adapt to market conditions.
InvestingPro Insights
The recent revision by UBS on Avery Dennison Corporation (NYSE:AVY) reflects a cautious outlook on the company's growth potential, particularly in its RFID segment. To provide additional context to investors, InvestingPro data shows a market capitalization of $17.3 billion and a P/E ratio of 28.35, which indicates a relatively high valuation based on earnings. As of the last twelve months up to Q2 2024, Avery Dennison has experienced a modest revenue growth of 1.14%, suggesting a steady, albeit not rapid, expansion in sales.
According to InvestingPro Tips, Avery Dennison has a history of delivering to its shareholders, having raised its dividend for 13 consecutive years, and maintaining dividend payments for 54 consecutive years. This demonstrates a commitment to returning value to investors, which could be a reassuring factor amidst concerns over the pace of RFID segment growth. However, it's also noted that five analysts have revised their earnings downwards for the upcoming period, which may be aligned with UBS's cautious stance.
For investors seeking a deeper analysis and additional insights, InvestingPro offers more tips on Avery Dennison, which can be accessed through Investing.com/pro/AVY. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, unlocking a wealth of data and expert analysis to inform your investment decisions. There are a total of 11 additional InvestingPro Tips available for Avery Dennison, providing a comprehensive view of the company's financial health and market performance.
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