ModernGraham Valuation: Avery Dennison Corp (AVY)

moneyCompany Profile (obtained from Google Finance): Avery Dennison Corporation (Avery Dennison), is engaged in the production of pressure-sensitive materials, and a variety of tickets, tags, labels other converted products, and office and consumer products through embossing, printing, stamping and die-cutting. The Company operates in two segments: Pressure-sensitive Materials and Retail Branding and Information Solutions. In addition to its reportable segments, the Company has other specialty converting businesses comprised of Vancive Medical Technologies (Vancive) and Designed and Engineered Solutions (DES). Some are sold by the Company in converted form as printable media, tapes and reflective sheeting. In July 2013, Avery Dennison Corp completed the sale of its Office and Consumer Products and Designed and Engineered Solutions businesses to CCL Industries Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $55.18
MG Opinion Fairly Valued
Value Based on 3% Growth $20.78
Value Based on 0% Growth $12.18
Market Implied Growth Rate 13.03%
Net Current Asset Value (NCAV) -$10.22
PEmg 34.57
Current Ratio 1.38
PB Ratio 3.06

Balance Sheet – 9/30/2013 

Current Assets $2,164,900,000
Current Liabilities $1,573,400,000
Total Debt $950,900,000
Total Assets $4,732,800,000
Intangible Assets $857,500,000
Total Liabilities $3,158,900,000
Outstanding Shares 97,230,000

Earnings Per Share

2013 (estimate) $2.38
2012 $1.63
2011 $1.45
2010 $2.97
2009 -$7.21
2008 $2.70
2007 $3.07
2006 $3.51
2005 $2.90
2004 $2.78
2003 $2.43

Earnings Per Share – ModernGraham 

2013 (estimate) $1.43
2012 $0.74
2011 $0.40
2010 $0.25
2009 -$0.41
2008 $2.99


Avery Dennison Corp fails to satisfy either the Defensive Investor or the Enterprising Investor following Benjamin Graham’s value investing methods.  The company’s current ratio is too low for either investor type, it has not had sufficient earnings stability, it hasn’t had suitable earnings growth over the long term for the Defensive Investor, and it trades at PEmg and PB ratios that are too high.  Either investor type should do considerably more research before entering any investment in Avery Dennison Corp, beginning with a review of ModernGraham’s Valuation of Bemis Company.  As for a valuation, the company has grown EPSmg (normalized earnings) from $-0.41 in 2009 to an estimated $1.43.  This level of growth supports the market’s implied growth rate of 13.03%, so the company may appear to be fairly valued.  However, it should be noted that in 2008 the EPSmg was $2.99, so the growth may not quite be what it seems.  This adds fuel to the fire that Avery Dennison Corp may be more suitable to speculators than Intelligent Investors.

What do you think?  Do you agree that Avery Dennison Corp is fairly valued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Avery Dennison Corp (AVY) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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