Avery Dennison sticking to products with growth potential
Most people have probably encountered Avery Dennison Corp. products without even knowing it.
The Pasadena company makes self-adhesive labels used on a wide variety of consumer goods: beer and wine bottles, shampoo and personal care items, pharmaceuticals and food. It also makes labels and tags attached to clothing.
You know those annoying plastic fasteners that connect price tags to shirts, dresses and other clothing? Yep, they make those too.
“We’re everywhere you look, and you don’t think about us a whole lot,” said Dean A. Scarborough, the company’s chief executive.
It’s not a business that’s going to turn heads. But it’s profitable and has been around a long time — nearly 80 years — surviving recessions and technological advances that have put other companies out of business.
One of its new products involves tags with radio-frequency technology that help retailers track inventory and sales and prevent theft.
The company was founded in 1935 by a struggling clerk named Stan Avery, who created a labeling machine that made it easier for retailers to put price tags on their products. In 1990, Avery International merged with Dennison Manufacturing to become Avery Dennison.
Avery Dennison earned $215 million last year on sales of more than $6 billion.
“It’s a pretty steady business,” Scarborough said. “Even in a recession, people still wash their hair and buy clothes when their clothes wear out. Those are fairly stable industries with market growth rates in the 3% to 5% range.”
The latest
In January, Avery Dennison agreed to sell two of its business units to CCL Industries Inc. for $500 million. The units make Avery brand office products and specialty labels for electronics products. Combined, they were responsible for $910 million in sales last year.
Avery office products — folders, binders and labels — are sold at office supply retailers such as Staples and Office Depot.
“It’s probably the most recognized by consumers even though it was our third-largest business,” Scarborough said. “The electronic office is truly upon us, so that business has been shrinking for the last 10 years.”
Some of the money from the sale will be used to fund the company’s employee pension plan and to buy back shares, a move that Scarborough said will create value for shareholders.
The sale also makes sense because office supplies were the only products that Avery Dennison sold to consumers; the rest of its operation is based on a business-to-business model, Scarborough said.
Accomplishments
The company’s stock price is up about 17% this year, evidence that investors are pleased with its direction and its plans to unload the office products unit, Scarborough said.
“Last year was a good year. We started to deliver and investors see that,” Scarborough said.
With nearly eight decades of experience in labeling, Avery Dennison has little concern about losing business to competitors.
“We believe that entry of competitors into the field of pressure-sensitive adhesives and materials is limited by technical knowledge and capital requirements,” the company said in its 2012 annual report.
“We believe that our technical knowledge, relative size and scale of operations, ability to serve our customers with a broad line of quality products and service programs, distribution and brand strength, and development and commercialization of new products are among the more significant factors in maintaining and further developing our competitive position.”
Challenges
By selling its office-products unit, Avery Dennison will be losing a significant source of revenue.
“We’re a smaller company, but we’re getting rid of the business that’s shrinking, with profitability going down,” Scarborough said. “Therefore, our earnings growth rate is higher and we’re more focused.”
Analyst Opinion
Two analysts have the stock as a buy, five as a hold and one recommends selling the stock. The average one-year target price for the stock is $41.67 a share.
