Avery Dennison Corporation (NYSE:AVY): A Compounder Facing Minor Hiccups

We came across a bullish thesis on Avery Dennison Corporation (NYSE:AVY) on ValueInvestorsClub by jso1123. In this article, we will summarize the bulls’ thesis on AVY. The company’s shares were trading at $183.00 when this thesis was published, vs. the closing price of $170.85 on Apr 17.

AVY is a materials science and digital identification solutions company that provides pressure-sensitive label materials, performance tape products and other pressure-sensitive adhesive-based materials.

AVY commands a 40% market share of pressure-sensitive label stock, a market where the top four players capture 80% of the market. On the other hand, its customers are highly fragmented with the top 20 players accounting for 20-30% of the market. Such dynamics allow AVY to dictate pricing and ensure AVY offers a high ROIC with low volatility.

The RFID market is also largely untapped with only the apparel segment having a 40% penetration. Overall, the reach is only 5% and is expected to witness a volume growth of 20-25% and revenue growth of 15-20% due to deflationary pricing in chips. Partners like Walmart are looking to deploy RFID in ten categories of its products that would cover 50% of its floor space. Other major brands like Amazon, UPS, GAP and Uniqlo are also building the use case for RFID. Another driver for RFID is the mandate for European Digital Product Passport (DPP) which requires a digital record of information about the product. The transition of barcode standards from 1D to 2D barcodes should also ramp up the demand for RFID as a handier alternative.

The demand for apparel, a segment driving 65-70% of AVY’s revenue, is set to improve after a 25% drop in demand at the end of 2023. The three quarters of 2024 have been better and should ensure decent growth for AVY.

The stock is trading at a level close to what it was three years ago and is down 22% in the last six months. AVY has historically traded at multiples close to the SPX but is currently at 0.7x. With the RFID segment re-accelerating in 2025, AVY can generate an EPS of $14-15 in 2027. Using a conservative multiple of 19x, the fair value should be in the range of $266-285. A lower estimate should offer a 56% gain from its current level.

While we acknowledge the potential of AVY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AVY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.