Avery Dennison Corp (AVY)

Conclusion

Avery Dennison makes pressure-sensitive label materials, graphics films, performance tapes and item-level RFID and branding solutions. At a price of 188.05 USD, the market capitalisation is 14.2 billion USD and the enterprise value is 17.5 billion USD.

The verdict is fair. Today's price-to-earnings ratio of 20.0 sits below its ten-year median of 22.2, and enterprise value to EBITDA of 12.0 sits below 13.8. The discounted cash flow gives 244.23 USD per share at a discount rate of 8.9%, and the fair value from historical multiples is 223.40 USD. The fair value band runs from 187.05 to 280.58 USD with a midpoint of 233.82 USD, a margin of safety of 24.3% at the current price. The reverse DCF implies growth of 0.85% a year, against revenue growth of 4.9% over five years and free cash flow per share growth of 7.8%.

What holds the case up is the return on invested capital of 14.5% against a weighted cost of capital of 7.8%, free cash flow conversion of 145.6% over the last twelve months, and an Altman Z-score of 3.65. The weakest numbers are net debt to EBITDA of 2.29, a quick ratio of 0.68, and next-year earnings estimates that were cut over the last 90 days (-0.97%), with five downgrades against two upgrades in the last 30 days.

Financial health

Financial strength is yellow: the Altman Z-score of 3.65 is good, while net debt to EBITDA of 2.29, interest cover of 7.7 and a current ratio of 1.16 are neutral. The quick ratio is 0.68 and debt to equity is 1.51, so the balance sheet relies on inventory and receivables to cover short-term obligations. The Altman Z-score of 3.65 falls in the safe zone. Insolvency risk is low, about 2.2% by the estimate of the Ohlson model over one to two years, based on figures as of 31 December 2025. The company's leverage is moderate rather than heavy, and its interest costs are covered by operating profit more than seven times over.

Earnings quality

Earnings quality is green: free cash flow conversion is good at 145.6% on a trailing twelve-month basis and 100.8% over five years. The accrual ratio is -2.25%, meaning cash generation runs ahead of reported earnings. Stock-based compensation is only 0.29% of revenue, and free cash flow after it is 1.00 billion USD. The share count fell at a compound rate of -1.65% over five years, reflecting buybacks. The Piotroski score is 5 out of 9. The Beneish M-score is not available. The company beat earnings estimates in six of the last eight quarters, with an average surprise of 3.4%. Estimates for the current year rose slightly (+0.26% over 90 days), while next-year estimates fell by 0.97%.

Profitability

Profitability is green. The gross margin is 28.8% against a ten-year median of 27.4%, the operating margin is 12.2% against 11.7%, and the net margin is 7.6% against 7.2%. Operating margin stability is 7.1%. Return on invested capital is 14.5% against a weighted cost of capital of 7.8%, and the reported spread of 6.7% points creates value. The five-year median return on invested capital is 15.6%. Return on equity of 29.7% is flattered by leverage: the DuPont split shows a net margin of 7.8%, asset turnover of 1.01 and an equity multiplier of 3.93, so most of the high return comes from borrowing rather than from the business alone.

Growth

Growth is green, though the trend is mixed. Revenue compounded at -0.7% over three years, 4.9% over five years and 4.0% over ten years. Earnings per share compounded at -1.2% over three years, 6.1% over five years and 11.7% over ten years. Free cash flow per share grew 4.5% over three years, 7.8% over five years and 10.3% over ten years. Revenue grew in seven of the last ten years. Analysts expect next-year earnings per share to grow 8.7%, although the recent estimate cuts weigh against that forecast.

Valuation

Valuation is yellow, with the verdict fair and a margin of safety of 24.3%. The price-to-earnings ratio of 20.0 is a 9.9% discount to its ten-year median of 22.2, enterprise value to EBITDA of 12.0 is a 13.2% discount to 13.8, and price to free cash flow of 13.8 is a 36.8% discount to 21.8. The discounted cash flow gives 244.23 USD per share, using a discount rate of 8.9%, five-year growth of 4.9% and terminal growth of 2.5%. The terminal value makes up 56.0% of that figure. The fair value from historical multiples is 223.40 USD. Both are order-of-magnitude estimates built on fixed assumptions, including a 5% equity risk premium and capped growth, and are not price targets. The reverse DCF implies growth of 0.85%, which sits 4.1% below five-year revenue growth and 6.9% below five-year free cash flow per share growth. The dividend yield is 2.09%, with a payout of 28.7% of free cash flow.

Risks

The main risk is leverage: net debt equal to 2.29 times EBITDA leaves less room to absorb a fall in earnings, and the quick ratio of 0.68 means short-term obligations depend on converting inventory and receivables. A fall in operating margin from 12.2% would narrow the return on invested capital spread of 6.7% points, which underpins the value-creation case. Negative earnings revisions for next year and a three-year earnings compound rate of -1.2% suggest the forecast growth is not yet secure. Beneish M-score data is not available, so the earnings manipulation screen is incomplete. The analysis has no debt maturity schedule and no revenue by segment, so refinancing risk and the mix of growth across businesses cannot be assessed.