Avery Dennison (AVY)

Adhesive manufacturing company Avery Dennison (NYSE:AVY) met Wall Street’s revenue expectations in Q1 CY2025, but sales were flat year on year at $2.15 billion. Its GAAP profit of $2.09 per share was 10.5% below analysts’ consensus estimates.

Company Overview

Founded as Kum Kleen Products, Avery Dennison (NYSE:AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.

Industrial packaging companies have built competitive advantages from economies of scale that lead to advantaged purchasing and capital investments that are difficult and expensive to replicate. Recently, eco-friendly packaging and conservation are driving customers preferences and innovation. For example, plastic is not as desirable a material as it once was. Despite being integral to consumer goods ranging from beer to toothpaste to laundry detergent, these companies are still at the whim of the macro, especially consumer health and consumer willingness to spend.

Competitors in the packaging industry include Crown Holdings (NYSE:CCK), Ardagh Group (NYSE:ARD), and Silgan Holdings (NASDAQ:SLGN).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Avery Dennison’s 4.4% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Avery Dennison’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Avery Dennison’s organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Avery Dennison’s $2.15 billion of revenue was flat year on year and in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months. While this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.

Avery Dennison’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 27.6% gross margin over the last five years. That means Avery Dennison paid its suppliers a lot of money ($72.39 for every $100 in revenue) to run its business.

Avery Dennison produced a 28.9% gross profit margin in Q1, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Avery Dennison has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 11.5%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Avery Dennison’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. We like to see margin expansion, but we’re still happy with Avery Dennison’s performance considering most Industrial Packaging companies saw their margins plummet.

In Q1, Avery Dennison generated an operating profit margin of 11.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Avery Dennison’s unimpressive 4.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Although it wasn’t great, Avery Dennison’s two-year annual EPS growth of 2.2% topped its flat revenue.

In Q1, Avery Dennison reported EPS at $2.09, down from $2.13 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Avery Dennison’s full-year EPS of $8.69 to grow 15.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Avery Dennison has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.6% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Avery Dennison’s margin dropped by 3.7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Avery Dennison burned through $59.9 million of cash in Q1, equivalent to a negative 2.8% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Avery Dennison hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.2%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Avery Dennison’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Avery Dennison reported $195.9 million of cash and $3.46 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.44 billion of EBITDA over the last 12 months, we view Avery Dennison’s 2.3× net-debt-to-EBITDA ratio as safe. We also see its $57.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

This was an in line quarter, with revenue and EBITDA meeting expectations. Operating margin was unchanged compared to the same quarter last year. The stock remained flat at $174.50 immediately following the results.

Updated: May 16, 2025 at 12:01 AM EDT

Before investing in or passing on Avery Dennison, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Avery Dennison falls short of our quality standards. For starters, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its market-beating ROIC suggests it has been a well-managed company historically, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its flat organic revenue disappointed.

Avery Dennison’s P/E ratio based on the next 12 months is 17.7x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $190.83 on the company (compared to the current share price of $181.87).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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