Over the past six months, Avery Dennison’s stock price fell to $166.80. Shareholders have lost 8% of their capital, which is disappointing considering the S&P 500 has climbed by 11.6%. 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? Get the full breakdown from our expert analysts, it’s free.
Why Is Avery Dennison Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid AVY and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in Industrial Packaging companies should track organic revenue in addition to reported 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 1.1% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Avery Dennison’s margin dropped by 3.4 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Avery Dennison’s free cash flow margin for the trailing 12 months was 6.9%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, 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.
Final Judgment
Avery Dennison isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 16.2× forward P/E (or $166.80 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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