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Here is a look at how Avery Dennison Corp (NYSE:AVY) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$55.18
MG OpinionFairly Valued
Value Based on 3% Growth$20.78
Value Based on 0% Growth$12.18
Market Implied Growth Rate13.03%
Net Current Asset Value (NCAV)-$10.22
PEmg34.57
Current Ratio1.38
PB Ratio3.06

Balance Sheet - 9/30/2013

Current Assets$2,164,900,000
Current Liabilities$1,573,400,000
Total Debt$950,900,000
Total Assets$4,732,800,000
Intangible Assets$857,500,000
Total Liabilities$3,158,900,000
Outstanding Shares97,230,000

Earnings Per Share

2013 (estimate)$2.38
2012$1.63
2011$1.45
2010$2.97
2009-$7.21
2008$2.70
2007$3.07
2006$3.51
2005$2.90
2004$2.78
2003$2.43

Earnings Per Share - ModernGraham

2013 (estimate)$1.43
2012$0.74
2011$0.40
2010$0.25
2009-$0.41
2008$2.99

Conclusion:

Avery Dennison Corp fails to satisfy either the Defensive Investor or the Enterprising Investor following Benjamin Graham's value investing methods. The company's current ratio is too low for either investor type, it has not had sufficient earnings stability, it hasn't had suitable earnings growth over the long term for the Defensive Investor, and it trades at PEmg and PB ratios that are too high. Either investor type should do considerably more research before entering any investment in Avery Dennison Corp, beginning with a review of ModernGraham's Valuation of Bemis Company (NYSE:BMS).

As for a valuation, the company has grown EPSmg (normalized earnings) from $-0.41 in 2009 to an estimated $1.43. This level of growth supports the market's implied growth rate of 13.03%, so the company may appear to be fairly valued. However, it should be noted that in 2008 the EPSmg was $2.99, so the growth may not quite be what it seems. This adds fuel to the fire that Avery Dennison Corp may be more suitable to speculators than Intelligent Investors.

What do you think? Do you agree that Avery Dennison Corp is fairly valued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?

Disclosure: The author did not hold a position in Avery Dennison Corp (AVY) at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Avery Dennison Corp.