AVY Avery Dennison
A quality label franchise priced for RFID growth its flat revenue history doesn't support; wait for a lower price.
The story
Avery Dennison is the global leader in pressure-sensitive label materials, with a growing RFID and intelligent-labels business. Its scale, converter relationships and materials science give it a real but narrow moat in a mature, GDP-linked industry. Revenue has been flat for five years (about -0.7% CAGR) and margins have cycled between 10% and 12%, which points to a mature cyclical compounder rather than a growth franchise.
I kept my previous drivers because nothing material has changed. TTM revenue of 9.25B, up about 4% from 8.86B, matches the 4% growth assumption, and the 12% margin and 1.55 sales-to-capital match the 12.5% target and 1.5 assumption. The roughly 67% gap to market reflects my skepticism about RFID-led growth that the market is pricing in, and it is below the 100% threshold that would force me to revisit the drivers.
Value drivers
| Revenue growth (Y1) | 4.0% |
| Terminal growth | 2.0% |
| Forecast horizon | 5y |
| Target operating margin | 12.5% |
| Years to target margin | 5 |
| Sales-to-capital | 1.50 |
| Beta | 1.15 |
| Failure probability | 2.0% |
| Cost of capital (WACC) | 9.4% |
| Terminal WACC | 8.9% |
Valuation bridge
| PV of explicit FCFF | 2.80B |
| PV of terminal value | 8.01B |
| Equity value | 7.13B |
| ÷ shares → per share | $94.11 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 9.62B | 4.0% | 12.1% | 864.23M | 246.62M | 617.61M | 564.36M |
| 2 | 9.95B | 3.5% | 12.2% | 902.21M | 224.42M | 677.79M | 565.96M |
| 3 | 10.25B | 3.0% | 12.3% | 937.24M | 199.09M | 738.15M | 563.22M |
| 4 | 10.51B | 2.5% | 12.4% | 968.84M | 170.89M | 797.95M | 556.36M |
| 5 | 10.72B | 2.0% | 12.5% | 996.55M | 140.13M | 856.42M | 545.65M |
Key risks
- RFID/intelligent labels scale faster than expected, driving sustained mid-single-digit growth and margins above 14%
- Destocking or a consumer-goods volume slump compresses margins back toward 10%
- Leverage (3.5B net debt) plus buybacks reduce flexibility in a downturn
Catalysts
- RFID adoption mandates in retail, food and logistics that show up in reported growth
- A cyclical selloff that brings the price toward intrinsic value