Has Avery Dennison Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Avery Dennison (NYSE: AVY  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Avery Dennison.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.8%

Fail

 

1-Year Revenue Growth > 12%

6.3%

Fail

Margins

Gross Margin > 35%

25.3%

Fail

 

Net Margin > 15%

3.0%

Fail

Balance Sheet

Debt to Equity < 50%

87.5%

Fail

 

Current Ratio > 1.3

1.13

Fail

Opportunities

Return on Equity > 15%

9.6%

Fail

Valuation

Normalized P/E < 20

19.85

Pass

Dividends

Current Yield > 2%

3.4%

Pass

 

5-Year Dividend Growth > 10%

(8.1%)

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Avery Dennison last year, the company has lost a point. That said, shareholders aren't too disappointed with the stock; it has risen around 15% in the past year.

Avery Dennison has faced some substantial challenges because of the tough economy. With Europe in decline, demand for the company's products, which include packaging materials, adhesives, and industrial materials, has been fairly weak in recent years. Analysts are projecting a decline in earnings per share for 2012 before a potential rebound next year.

Avery's response to the tough conditions has been to sell off parts of its business. Earlier this year, 3M (NYSE: MMM  ) bought Avery's office and consumer products unit for $550 million, marking a major accomplishment for 3M in eliminating a primary competitor but reflecting the same overall weakness in the office supply industry that led MeadWestvaco (NYSE: MWV  ) to sell off its consumer and office products business to Acco Brands (NYSE: ACCO  ) . Then earlier this month, Avery sold its solar-cell conductive back sheets business to a Finnish company, Cencorp. The deal, though minor, reflects Avery's desire to focus on its core operations.

But one interesting technology Avery's involved in is a health diagnostic sensor. Just as Nike (NYSE: NKE  ) has provided athletes with important data about their workouts in its Nike+ tracking devices, Avery hopes to allow people to foresee health issues before they become life-threatening. With wireless devices becoming omnipresent and finding new applications, the phenomenon that Fool contributor Alex Planes calls the "Wearable Revolution" could finally get Avery moving in the right direction.

For Avery to improve, it needs to break out of its old mold and start moving in innovative new ways. If it can do so, though, it has plenty of room to move higher toward perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Avery Dennison may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Avery Dennison to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of and creating diagonal call positions on 3M and Nike. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy. 


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