Negative EPS surprise shows weakness of Avery Dennison

Exchange: NYSE

Sector: Consumer Goods

Industry: Diversified Machinery

Entry strategy

Price: $90–100

Stop-loss: $105.67

Take profit: $77, then maybe $55

Investment horizon: until the mid-March of 2019

Company details

Avery Dennison Corporation ($AVY) is the world leader in labeling. Among the company’s customers are manufacturers of consumer goods and clothing, products for transportation, construction, automotive and healthcare.

    The corporation produces

  • packaging, labels and tags for goods identification,
  • RFID tags for radio identification of products — for example, for tracking them in stock;
  • medical products, including wearable sensors.

The Avery Dennison Corporation headquarters is located in Glendale, California. The company also employs about 30 thousand employees worldwide.

The issuer’s capitalization is more than $8 billion (group + Mid).

Company financial performance

At first glance, the company reported fairly well for the 3rd quarter of 2018. It showed an increase in revenue, net profit and earnings per share (see Table 1).

Table 1. Quarterly financial results of Avery Dennison Corporation for Q3 2017 — for Q3 2018. Source: MarketWatchOpen original image

    However, there are negative signs in these financial results:

  • the cost of sales of the corporation grew by 6% to $1.3 billion — stronger than gross profit, which increased by 1.3% to $456.4 million;
  • EBITDA decreased by 2.7% compared to the same period last year;
  • earnings per share (EPS) is less than the consensus forecast of analysts.

At the same time, Avery Dennison’s Q3 2018 negative surprise in earnings per share is the first in quite a long time (see Graph 1).

Graph 1. EPS surprise, Avery Dennison Corporation in 2014–2018. Source: Zacks.comOpen original image

This stock is relatively expensive according to main multipliers (see Table 2 and Figure 1).

Table 2. Avery Dennison Corporation and its industry peers. Source: FinvizOpen original image
Figure 1. Main multipliers of Avery Dennison Corporation. Source: Simply Wall StOpen original image

On November 28, 2018, the US Federal Reserve Chairman Jerome Powell delivered a speech. It influenced market forecasts about the monetary policy of the American regulator. We expect that the active phase of the rate hikes is over.

The changing conditions of the global economy can drastically affect the financial models of analysts — they may reevaluate their portfolios and reduce the proportion of overvalued stocks.

Technical analysis (trading plan)

The seasonality chart shows that first quarters and the periods from May to October do not statistically contradict short position on this stock. Therefore, we expect that the first goal of the price decreasing ($77) can be achieved until mid-March 2019. After that, you will need to act on the situation.

Graph 2. Avery Dennison Corporation ($AVY) seasonality. Source: Equity ClockOpen original image

Trading plan for the stock:

Graph 3. Technical analysis of Avery Dennison Corporation. ($AVY). Source: TradingViewOpen original image

Published on the 13th of December, 2018