Avery Dennison (AVY) stock has fallen by -2.4 % this afternoon. At $187.05 per share, the company is fairly valued — but it's essential that potential investors consider the company's growth indicators and market sentiment before committing.
Avery Dennison Corporation manufactures and markets pressure-sensitive materials and products in the United States, Europe, Asia, Latin America, and internationally. The large-cap Industrials company has 35,570 full time employees and is based in Mentor, United States.
AVY's P/E Ratio Is Comparable to its Sector Average
Compared to the Industrials sector's average of 21.46, Avery Dennison has a trailing twelve month price to earnings (P/E) ratio of 18.9 and an expected P/E ratio of 18.5. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($9.89) or forward earnings per share ($10.13).
Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Avery Dennison's P/E ratio is near its sector average of 21.46, we can deduce that the market is fairly valuing the company's earnings.
Avery Dennison Is Overvalued in Terms of Expected Growth
Avery Dennison's PEG ratio is 2.7. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Avery Dennison's case, it tells us the company is overvalued.
AVY Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Avery Dennison's P/B ratio of 7.6 is higher than its sector average of 3.7, such a margin of safety does not exist for the stock.
AVY Is Generating Cash
Avery Dennison has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 20.0%, compared to 4.7% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 27.2% and a coefficient of variability of 25.7%:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 1,047 | -272 | 775 | 45.43 |
| 2020-12-31 | 751 | -219 | 533 | 8.87 |
| 2019-12-31 | 746 | -257 | 489 | n/a |
Avery Dennison's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Avery Dennison's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Avery Dennison's Gross Margins
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 8,408 | 6,096 | 27.51 | -0.29 |
| 2020-12-31 | 6,972 | 5,048 | 27.59 | 2.45 |
| 2019-12-31 | 7,070 | 5,166 | 26.93 | n/a |
Avery Dennison's Operating Margins
| Date Reported | Total Revenue ($ MM) | Operating Expenses ($ MM) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 8,408 | 1,248 | 12.66 | 2.26 |
| 2020-12-31 | 6,972 | 1,060 | 12.38 | 6.27 |
| 2019-12-31 | 7,070 | 1,080 | 11.65 | n/a |
Avery Dennison's cost of revenue is growing at a rate of 9.2% in contrast to 7.9% for operating expenses. Sales revenues, on the other hand, have experienced a 9.6% growth rate. As a result, the average gross margins growth is 1.1 and the average operating margins growth rate is 4.3, with coefficients of variability of 1.3% and 4.3% respectively.
We See Mixed Market Signals Regarding AVY
Avery Dennison has an average rating of buy and target prices ranging from $240 to $185. At its current price of $187.05, the company is trading -9.79% away from its target price of $207.36. 2.3% of the company's shares are linked to short positions, and 93.3% of the shares are owned by institutional investors.
| Holder | Shares | Date Reported | Percentage | Value |
|---|---|---|---|---|
| Vanguard Group, Inc. (The) | 9,776,843 | 2022-09-29 | 12% | $1,828,807,295 |
| Blackrock Inc. | 6,304,908 | 2022-09-29 | 8% | $1,179,364,519 |
| T. Rowe Price Investment Management, Inc. | 4,069,495 | 2022-09-29 | 5% | $761,219,357 |
| State Street Corporation | 3,647,786 | 2022-09-29 | 5% | $682,336,583 |
| Price (T.Rowe) Associates Inc | 2,203,403 | 2022-09-29 | 3% | $412,157,532 |
| Victory Capital Management Inc. | 2,098,046 | 2022-09-29 | 3% | $392,449,979 |
| Lazard Asset Management LLC | 1,892,796 | 2022-09-29 | 2% | $354,056,941 |
| Ameriprise Financial, Inc. | 1,665,908 | 2022-09-29 | 2% | $311,616,408 |
| Geode Capital Management, LLC | 1,609,183 | 2022-09-29 | 2% | $301,005,714 |
| Neuberger Berman Group, LLC | 1,549,348 | 2022-09-29 | 2% | $289,813,278 |
