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3 Reasons AVY is Risky and 1 Stock to Buy Instead

By: StockStory

January 17, 2025 at 04:06 AM EST

AVY Cover Image

Over the past six months, Avery Dennison’s stock price fell to $188.25. Shareholders have lost 15.5% of their capital, which is disappointing considering the S&P 500 has climbed by 6.6%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Avery Dennison, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even though the stock has become cheaper, we're cautious about Avery Dennison. Here are three reasons why there are better opportunities than AVY and a stock we'd rather own.

Why Do We Think Avery Dennison Will Underperform?

Founded as Kum Kleen Products, Avery Dennison (NYSE: AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.

1. Core Business Falling Behind as Demand Declines

We can better understand Industrial Packaging companies by analyzing their organic revenue. This metric gives visibility into Avery Dennison’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Avery Dennison’s organic revenue averaged 2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Avery Dennison might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). Avery Dennison Organic Revenue Growth

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Avery Dennison’s EPS grew at an unimpressive 7.5% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 4.2% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Avery Dennison Trailing 12-Month EPS (Non-GAAP)

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Avery Dennison’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Avery Dennison Trailing 12-Month Return On Invested Capital

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Avery Dennison, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 18.5× forward price-to-earnings (or $188.25 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.

Stocks We Would Buy Instead of Avery Dennison

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.

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