Not that long ago, pressure-sensitive materials manufacturer Avery Dennison (NYSE:AVY) had a reputation for steady growth and solid free cash flow generation. Since the credit crisis, it has lost that reputation and is now losing the confidence of its shareholders. A solid dividend yield, low valuation and potential buyout from a rival remain investment positives, though sustainable gains will require a return to growth.

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Full-Year Recap
Sales advanced 4.2% to $6 billion. The pressure-sensitive materials segment continued to account for the bulk of the total top line at 66% and grew 6.8% to $4 billion. This unit sells labels that adhere, or stick to a surface, such as an outdoor advertisement on a bus or billboard, such as those posted by Lamar Advertising Company (Nasdaq:LAMR). Rivals in the space include Bemis (NYSE:BMS) and 3M Corp (NYSE:MMM).

The retail branding unit weighed in at another quarter of sales and reported a modest sales decline of 1.4%. This business sells barcode tags and printed labels for retailers, apparel manufacturers and related distributors. Checkpoint Systems (NYSE:CKP) is a key rival in this space. The remaining segment also competes with 3M and is known as the specialty converting business. It sells adhesive tapes to a number of industries and saw sales increase a modest 2.1% to $553.9 million.

Pre-tax income fell 2.6% to $232.9 million on higher raw materials costs and other charges that consisted of severance along with other costs to try and right-size its operations to reflect the challenging sales growth trends they are experiencing. A loss from discontinuing a business sent reported net income down 40% to $190.1 million, or $1.78 per diluted share. Adjusting for the various one-time charges, Avery Dennison estimated recurring earnings at $2.16 per share, or down 31% from last year. (To know more about income statements, read Understanding The Income Statement.)

Outlook
Analysts project 0% sales growth for 2012 and total sales of $6.03 billion. The company expects earnings in a range of $1.95 and $2 per share. It anticipates free cash flow in a pretty wide range between $275 million and $325 million, or right around the $292 million reported for 2011.

The Bottom Line
For 2011, Avery logged free cash flow of more than $2.73 per diluted share. At the current share price about $28, that puts the trailing free cash flow multiple at around 10. This is a pretty low multiple, but the main issue is Avery Dennison has been unable to jump start growth since the recession brought on by the credit crisis. If it hits its targets for 2012, sales will return to 2008 levels while earnings and free cash flow will still fall well behind the profit levels it reported four years ago.

Avery Dennison remains firmly profitable and sports an appealing current dividend yield of 3.5%. An announced 8% increase in the payout will push the yield closer to 4%. It is also selling off businesses to retain units with a more appealing mix of profitability and growth potential. However, management's credibility is an issue given growth has been anemic for a number of years now. The best course of action may be to sell out to larger rival 3M, with a potential premium for existing shareholders. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.



Tickers in this Article: AVY, MMM, BMS, CKP, LAMR

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