Weak Market Conditions for AVY

Office products producer Avery Dennison (AVY) is expected to report a year-over-year rise in second-quarter earnings per share, but Zacks analyst Mario Ricchio is keeping the company a Hold for now. Find out why below:

We expect Avery Dennison (AVY) to report second quarter EPS of $1.12, up 13.1% year over year, amid price increases, strong international sales, and the benefits of ongoing productivity improvement and restructuring efforts. Avery is undertaking continuous productivity enhancement efforts, including restructuring actions such as reducing headcount and divesting low margin businesses, which will provide meaningful cost-savings in 2007 and beyond. Nevertheless, volume in Avery's Office and Consumer Products segment remains weak and company-wide domestic sales continue to decline reflecting weak market conditions. We retain our Hold recommendation on shares of AVY.

We have valued Avery using P/E valuation metric. Over the last five years, Avery has traded between 15x and 25x P/E. At the current price, Avery trades at 16.3x our 2007 EPS estimate of $4.18. The combination of restructuring initiatives, including headcount reduction and the sale of non-core, low margin businesses, as well as other productivity improvement initiatives bode well for 2007 EPS and beyond. Not until AVY posts a sustained high top-line growth, will we consider according it a significantly high P/E multiple. Our target price of $71.25 per share is based on a P/E of around 17.0x our 2007 EPS estimate of $4.18.

Headquartered in Pasadena, California, Avery Dennison Corporation (AVY) produces pressure-sensitive adhesives and materials, office products, and a variety of tickets, tags, labels, and other converted products.