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Portfolio Update

Show of Strength

By Elliott H. Gue, on Nov. 5, 2013

Excluding discontinued operations, specialty-chemicals outfit Avery Dennison Corp generated earnings per share of $0.69, fueled by a roughly 4 percent increase in net sales and improving profitability. The third quarter marked the fifth consecutive three-month period in which the company grew its adjusted earnings per share by more than 30 percent.

Management estimates that the firm netted about $390 million from the sale of its office and consumer products and designed and engineered solutions businesses to CCL Industries (TSX: CCL.A, CCL.B) and reiterated its commitment to using the proceeds to pay down debt and repurchase shares. To that end, the company repurchased 1.7 million shares for $75 million in the third quarter.

Avery Dennison operates two core divisions–pressure-sensitive materials (PSM) and retail branding and information solutions (RBIS)–both of which turned in solid third-quarter results.

The PSM division (almost 73 percent of third-quarter revenue) manufactures adhesive-coated labels and packaging materials for a laundry list of familiar consumer products, from Dawn detergents to Fiji and Heineken bottles and the US Postal Service’s shipping labels.

This segment posted year-over-year sales growth of 4 percent, while productivity initiatives, lower restructuring costs and higher volumes improved its adjusted operating margins by 120 basis points to 7.7 percent.

Management highlighted the strength of its pressure-sensitive packaging business in emerging markets, where the company’s solutions continue to win market share from traditional products. Meanwhile, the segment benefited from recovering demand in Europe, which is starting to shake off the effects of an extended economic malaise.

RBIS (26 percent of third-quarter revenue) designs and sells labels and packaging materials to retailers and apparel manufacturers. The lineup of products includes clothing tags and radio frequency identification (RFID) tags that facilitate inventory tracking and monitoring. RFID tags also help retailers reduce theft and decide which products to stock in a particular region.

Despite facing challenging year-over-year comparisons, Avery Dennison’s RBIS segment grew its adjusted operating margins by 100 basis points and increased its sales by 4 percent, driven by restructuring initiatives and strong demand from European retailers and brands.

In light of these results, management raised the midpoint of its full-year guidance for adjusted earnings per share to between $2.65 from $2.60. This forecast could prove conservative, as management based this outlook on the slowing sales trends that emerged in September and not the improved results in October.

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