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AVY AT A GLANCE

P/E ► -4.08   EV/EBITDA ► -13.1   ROA ► -10.4% LOW ROE ► -43.8% AVG Debt to Equity ► 3.47 AVG Current Ratio ► 0.868 LOW Interest Coverage Ratio ► -5.20 LOW

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Avery Dennison (NYSE: AVY) makes office products and self-adhesive labels that cover everything from shampoo bottles to highway signs ^[1]. The company also makes barcode tags, price tags, and security devices for retailers. With product sales in over 89 countries world-wide, international sales represented 60% of net sales in 2007^[2], a 5% increase from 2006 ^[3]. Avery Dennison's self-adhesive labels, which accounted for more than half of the company's revenue in 2007, are in high demand in international markets; these products have seen double-digit organic growth in Asia and single-digit organic growth in Latin America since 2006.^[4]

This demand however, is being threatened by a slowing economy as consumers are cutting back and spending less on office and home supplies. Increasing energy and commodities prices are also hiking up the cost of obtaining raw materials and making products. Avery Dennison is dependent on raw material such as paper, plastic film, and resins^[5] to make its products. Rising energy and commodities costs (paper prices were up 30-35% in 2007^[6])are forcing Avery Dennison into a difficult choice - raise prices on its products and risk losing customers, or cut its operating margins and earn less profit (operating margins fell from 7.8% in 2006 to 5.9% in 2007^[7]).

[edit] Business Overview

[edit] Product Segments

The company divides its sales into three different product segments:

[edit] Pressure-sensitive Materials (55% of net sales, 65% of operating income)

This segment sells labels and adhesives. These products are sold globally to label printers and other converters; so other corporations take this material and make all the labels you see on vitamin bottles and jars of jelly. These items are sold under the brands Fasson, JAC, and Avery Dennison. Net sales for this segment accounted for 55% of the company's revenue in 2007 ^[8].

AVY Net Sales by Segment^[9]

[edit] Office and Consumer Products (16% of net sales, 36% of operating income)

This segment sells binders, dividers, sheet protectors, printable media and other stationary products. This wide range of printable media and other products are usually sold through office product superstores, mass-market distributors, wholesalers and dealers. The products are sold under the brands Avery, Marks-A-Lot, and HI-LITER. This segment accounted for 16% of the company's net sales in 2007^[10].

[edit] Retail Information Services (RIS) (19% of net sales, 0% of operating income)

This segment sells barcodes, product labels, and other price marking and identification products. These various products are targeted to retailers, apparel manufacturers, distributors and industrial customers globally. They also make Radio Frequency Identification tags and other information management products which allow important data to be collected for market analysis. RIS accounted for 19% of the company's net sales in 2007^[11] but 0% of operating income due to restructuring costs and the transition costs associated with the acquisition of Paxar. ^[12]

Avery Dennison also earns revenue through its other specialty converting businesses. Some products in this segment include specialty tapes, automotive products,and business media. These sales accounted for 10% of the company's net sales in 2007^[13].

[edit] Avery Dennison Acquires Paxar Corporation

In March 2007, Avery Dennison bought Paxar Corporation, the company's largest competitor in the Retail Information Services industry, for $1.3 billion. Paxar makes retail tags, tickets, and has brand identification operations.^[14] The company was able to eliminate a major competitor and significantly expand its RIS operations with the acquisition. The company estimates that the acquisition will lead to high single-digit or low double-digit revenue growth in 2008, in addition to ^[15] to yielding annual cost savings between $90 and $100 million ^[16]. The acquisition does contain substantial risk for Avery Dennison, as they have substantially increased their debt; total debt more than doubled as it increased from $968M in 2006 to $2.3B in 2007. ^[17] Higher debt means that Avery Dennison will have to cut back on spending (R&D and pursuing other growth opportunities) in order to save money to eventually pay the debt off which would hurt long term growth.

[edit] Financial Metrics

Net sales increased 13% in 2007, from $5.6 billion in 2006, to $6.3 billion. The company estimates that the Paxar acquisition increased net sales by $500 million, a 76% increase^[18]. However the acquisition's high costs lowered the company's net income by almost 14% from $435 million to $375 million. High raw materials and energy costs also reduced profit margins by .3% from 27.6% to 27.3% ^[19].

AVY Net Sales & Net Income^[20]

[edit] Trends and Forces

[edit] A Slowing Economy Means Less Demand for Avery Dennison’s Products

In 2008 the large office supply retailer Staples (SPLS), which sells many of Avery Dennison's products on its shelves, reported that its second quarter earnings were lower than expected due to slower customer traffic and smaller orders ^[21]. This shows that the demand for Avery Dennison's products is decreasing, which could lead large retailers like Staples to sell fewer of Avery's products. Avery Dennison is dependent on consumers and businesses buying typical home and office products, especially durable goods. A slowing economy spells trouble for Avery. After taking a hit from the 2007-2008 credit crunch and slumping housing market, consumers have slowed their growth in spending to the smallest amount in years; in April 2008, consumer spending grew just .2% ^[22]. Additionally, consumers are fighting increased gasoline prices and other energy products. As consumers cut back on spending on the little things^[23], it leads to a decrease in the demand for Avery’s products.

[edit] Rising Commodities and Energy Prices are Forcing Avery Dennison to Make Difficult Choices

Avery Dennison has been forced to raise prices on some of its adhesive products due to higher raw materials costs. The ability to obtain raw materials such as paper, plastic films, and resins ^[24]at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins. For example the company faces higher paper costs, which were up 30-35% in 2007, an essential material in many of its products^[6].

Higher production costs due to high raw materials and energy costs have already forced the company to divest away from some of its low margin businesses and reduce its workforce ^[25][26]. The increasing price of energy adds to production costs as production plants and its machines are powered by oil and natural gas^[27], both of which are seeing record prices ^[28]. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.

[edit] A Weakening U.S. Dollar Helps Avery Dennison’s Foreign Profits

Because 60% of Avery Dennison's revenue comes from international sales ^[29], the fluctuations in the foreign currency exchange rates have a tremendous affect on the company's revenue. Although a weak US dollar ^[30] hurts the US economy as a whole, it actually is beneficial to Avery Dennison. A weakening US dollar means that every unit of foreign currency can be exchange for more and more dollars. So when Avery Dennison exchanges the revenue it collects in foreign currency into US dollars, the company is collecting more US dollars which translate into high profits. However, the opposite is just as true. If the dollar strengthens against foreign currency, it would hurt Avery Dennison's foreign profits.

[edit] Can Avery Dennison Successfully Integrate Paxar into its Business?

When Avery Dennison acquired its largest competitor in the retail information services industry, Paxar Corporation, the company was taking a large risk in concluding that it would be able to successfully integrate it into its long term plans and goals as well as make up the steep $1.3 billion cost (not to mention other types of fees and taxes). Although the company expects its RIS business to grow 5% in the medium to long-term because of this acquisition ^[31], the company also inherited new maintenance and energy costs, as well as a tremendous amount of debt. Short term debt increased three fold from $255M in 2006 to $1B in 2007 and long term debt doubled from $501M in 2006 to $1.1B in 2007. ^[17] To pay off the debt, Avery Dennison will have to cut back on spending and therefore decrease its investment in R&D as well as in other growth opportunities. In addition, any complications dealing with the integration of Paxar into the business would slow growth of the RIS business.

[edit] Competitors

Because Avery Dennison makes hundreds of different products, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.

Pressure-sensitive Materials Competitors:

3M Company (MMM) - 3M is one of the world's largest multi-industry companys as they sell a wide range of items, such as lcd TVs and band-aids, in a variety of markets. However, the company has a very strong presence in the pressure-sensitive materials market; the company's biggest name adhesive products are Scotch Tape and Post-It ^[33]. Both brands are AVY's biggest competition in the business.

UPM-Kymmene Oyj (UPM) - UPM is a global forest industry group that makes products such as magazine papers, newsprint, specialty papers, wood products, and self adhesive label materials ^[34]. These adhesive materials only accounted for 12% of the company's revenue in 2006 however, but still remains a big competitor of AVY in the business^[35].

Bemis Company (BMS) - Although the company focuses on making flexible packaging material, the company also has a strong pressure sensitive materials business. These products are sold in the label, graphic, and technical markets ^[36].

Office and Consumer Products Competitors:

Acco Brands (ABD) - is a top supplier of general office and business supplies. They sell office supplies ranging from staplers to binders, document finishing such as binding and lamination, and computer product accessories such as mice and keyboards. Its office products segment represent half of the company's annual revenue and thus make it a top competitor of AVY in this business^[41].

Retail Information Services Competitors:

Checkpoint Systms (CKP) - Checkpoint is a global producer of identification, tracking, security, and merchandising products for the retail industry^[43]. Since AVY's acquisiton of Paxar, Checkpoint has become the company's largest competitor in the business.

[edit] References

1. ↑ CNBC "Pulse of the Consumer (Video)" 28 March 2008
2. ↑ Avery Dennison"Quick Facts: Corporate Profile"
3. ↑ AVY 2006 Annual Report pg. 1
4. ↑ AVY 2007 Annual Report pg. 23
5. ↑ AVY 2007 Annual Report pg. 5
6. ↑ ^{6.0 6.1} B to B “Paper Prices Keep Rising” 11 July 2008
7. ↑ Google Finance: AVY Financial Statements
8. ↑ AVY 2007 Annual Report pg. 2-3
9. ↑ AVY 2007 Annual Report pg. 23-25
10. ↑ AVY 2007 Annual Report pg. 3-4
11. ↑ AVY 2007 Annual Report pg. 3
12. ↑ AVY 2007 Annual Report pg. 24
13. ↑ AVY 2007 Annual Report pg. 4
14. ↑ Los Angeles Times "Avery Dennison to Acquire Paxar" 23 March 2007
15. ↑ AVY 2007 Annual Report pg. 19
16. ↑ Press Release "Avery Dennison to Acquire Paxar for $1.3 billion or $30.50 per Share" 22 March 2007
17. ↑ ^{17.0 17.1} Google Finance: AVY Financial Statements
18. ↑ AVY 2007 Annual Report pg. 24
19. ↑ AVY 2007 Annual Report pg. 20-21
20. ↑ Google Finance: AVY
21. ↑ Yahoo! Finance "Staples warns on 2Q earnings" 19 Aug 2008
22. ↑ New York Times "Consumer Spending and Personal Income Slow" 31 May 2008
23. ↑ New York Times “Americans Cut Back Sharply on Spending” 14 Jan 2008
24. ↑ AVY 2007 Annual Report pg. 5
25. ↑ AllBusiness “Avery Dennison to Reduce Workforce, Divest Holdings” 1 Jan 2006
26. ↑ AVY 2007 Annual Report pg. 17
27. ↑ Yahoo! Finance “Sector Snap: Paper Product Makers Set for Rally?” 18 July 2008
28. ↑ CNN Money “Oil Hits $140 for the First Time” 26 June 2008
29. ↑ AVY 2007 Annual Report pg. 2
30. ↑ CNN Money “Dollar Hits New Low versus Euro” 15 July 2008
31. ↑ Reuters “Avery Dennison Provides an Update on Long-Term…” 4 Mar 2008
32. ↑ AVY 2007 Annual Report pg. 2-4
33. ↑ MMM 2007 Annual Report pg. 3-5
34. ↑ Google Finance: OTC: UPMKY Summary
35. ↑ UMPKY 2006 Annual Report pg. 13
36. ↑ BMS 2007 Annual Report pg. 3
37. ↑ ^{37.0 37.1 37.2} Google Finance: AVY
38. ↑ Google Finance: MMM
39. ↑ Google Finance: UPM
40. ↑ Google Finance: BMS
41. ↑ ABD 2007 Annual Report pg. 6-7
42. ↑ Google Finance: ABD
43. ↑ CKP 2007 Annual Report pg. 3
44. ↑ Google Finance: CKP