By Sindhu Subramaniam
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
| 2013-09-30 | 2013-12-31 | 2014-03-31 | 2014-06-30 | 2014-09-30 | |
|---|---|---|---|---|---|
| Revenues | 1504.9 | 1583.9 | 1550.1 | 1615.8 | 1559.6 |
| Revenue Growth (Qtr YOY) | 1.1 | 3.4 | 3.4 | 4.1 | 3.6 |
| Earnings | 62.0 | 44.7 | 71.6 | 44.4 | 65.0 |
| Earnings Growth (Qtr YOY) | 62.7 | 33.8 | 7.2 | -37.3 | 4.8 |
| Net Margin | 4.1 | 2.8 | 4.6 | 2.7 | 4.2 |
| EPS | 0.6 | 0.4 | 0.7 | 0.5 | 0.7 |
| Return on Equity | 16.1 | 11.7 | 19.2 | 12.1 | 19.0 |
| Return on Assets | 5.0 | 3.8 | 6.2 | 3.9 | 5.7 |
Revenue Growth Versus Earnings Growth
Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings. AVY's year-on-year change in top line compared to the same period last year of 3.63% trailed its change in earnings which was 4.84%. The company's performance this period suggests a focus on boosting the bottom-line earnings. While the revenue performance could be higher, it is important to note that this change in revenues is among the highest in the peer group thus far. Also, for comparison purposes, revenues changed by -3.48% and earnings by 46.40% compared to the immediate last quarter.
Earnings Growth Analysis
The company's earnings have gone up year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations - gross and EBITDA margins are currently at 25.69% and 7.98%, respectively, and 30.11% and 10.47% for the same period last year. For comparison, gross margins were 29.77% and EBITDA margins 11.61% in the immediate last quarter.
Gross Margin Trend
Companies sometimes trade off for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet. The company's decline in gross margins is offset by some improvements on the balance sheet side - working capital management shows progress. The company's working capital days have gone down to 27.54 from 36.15 for the same period last year and suggests that the gross margin decline is not altogether bad.
Operating Cash Flow Growth Versus Earnings Growth
Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods. AVY's year-on-year change in Operating Cash Flow of 288.57% is better than its change in earnings, suggesting that the company might have been able to declare a higher earnings number. In addition, this change in Operating Cash Flow is better than average among the declared results thus far in its peer group.
Unusual Items
The company's earnings growth has also been influenced by the following factors: (1) Improvements in EBIT margins from 6.99% to 7.98% and (2) unusual items. The company's pretax margins are now 6.49% compared to 4.97% for the same period last year.
EPS Growth Versus Earnings Growth
AVY's year-on-year change in Earnings per Share (EPS) of 7.17% is better than its change in earnings of 4.84%. In addition, this change in earnings is less than the peer average among the declared results thus far in its peer group, suggesting that the company is losing ground in generating profits in this group.
Supporting Data
The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
| 2013-09-30 | 2013-12-31 | 2014-03-31 | 2014-06-30 | 2014-09-30 | |
|---|---|---|---|---|---|
| Revenues | 1504.9 | 1583.9 | 1550.1 | 1615.8 | 1559.6 |
| Revenue Growth (Qtr YOY) | 1.1 | 3.4 | 3.4 | 4.1 | 3.6 |
| Peer Average Revenue Growth (Qtr YOY) | 3.2 | 2.3 | 0.6 | 1.0 | -3.5 |
| Earnings | 62.0 | 44.7 | 71.6 | 44.4 | 65.0 |
| Earnings Growth (Qtr YOY) | 62.7 | 33.8 | 7.2 | -37.3 | 4.8 |
| Peer Average Earnings Growth (Qtr YOY) | 12.8 | 37.5 | 3.9 | -15.7 | 10.0 |
| Operating Cash Flow | 49.0 | 224.4 | -108.0 | 117.8 | 190.4 |
| Peer Average Operating Cash Flow | 159.8 | 206.4 | 21.2 | 120.8 | 184.0 |
| Operating Cash Flow Growth (Qtr YOY) | -56.2 | 24.7 | 5.8 | -12.3 | 122.8 |
| Peer Average Operating Cash Flow Growth (Qtr YOY) | -6.7 | 17.7 | 11.0 | 3.7 | 25.1 |
| Gross Margin | 30.1 | 29.4 | 29.6 | 29.8 | 25.7 |
| Peer Average Gross Margin | 26.7 | 26.1 | 26.7 | 27.6 | 25.6 |
| EBITDA Margin | 10.5 | 12.3 | 10.4 | 11.6 | 8.0 |
| Peer Average EBITDA Margin | 13.1 | 13.1 | 13.3 | 15.1 | 13.6 |
| Net Margin | 4.1 | 2.8 | 4.6 | 2.7 | 4.2 |
| Peer Average Net Margin | 4.2 | 4.4 | 4.3 | 4.0 | 5.3 |
| Working Capital Days | 36.1 | 32.4 | 31.4 | 29.3 | 27.5 |
| Peer Average Working Capital Days | 52.5 | 53.9 | 54.6 | 59.1 | 59.6 |
| EPS | 0.6 | 0.4 | 0.7 | 0.5 | 0.7 |
| Peer Average EPS | 0.6 | 0.5 | 0.6 | 0.6 | 0.4 |
| EPS Growth (Qtr YOY) | 11.3 | -11.2 | 28.2 | -32.5 | 7.2 |
| Peer Average EPS Growth (Qtr YOY) | 13.4 | 28.5 | 10.6 | -10.4 | 9.2 |
| Return on Equity | 16.1 | 11.7 | 19.2 | 12.1 | 19.0 |
| Peer Average Return on Equity | 16.3 | 15.1 | 16.1 | 13.9 | 19.3 |
| Return on Assets | 5.0 | 3.8 | 6.2 | 3.9 | 5.7 |
| Peer Average Return on Assets | 5.1 | 4.7 | 5.5 | 5.1 | 5.9 |
Company Profile
Avery Dennison Corp. engages in the provision of labeling and packaging materials and solutions. It operates through the following segments: Pressure-Sensitive Materials, Retail Branding and Information Solutions, and Vancive Medical Technologies. The Pressure-Sensitive Materials segment provides pressure-sensitive labeling technology and materials, films for graphic and reflective applications, performance polymers, and specialty tapes. The Retail Branding and Information Solutions segment designs, manufactures, and sells brand and price tickets, tags and labels, and related services, supplies, and equipment. The Vancive Medical Technologies segment manufactures pressure-sensitive adhesive products for surgical, wound care, ostomy, and electromedical applications. The company was founded by R. Stanton Avery in 1935 and is headquartered in Pasadena, CA.
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