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Avery Dennison's Mystery Slide

Market: Stock is off 40% this year in spite of 'buy' grades by analysts who say investors are misinterpreting global business trends.


Executives at adhesive maker Avery Dennison Corp. are wondering why their stock has come unglued in recent weeks.

Shares of the Pasadena-based company, which makes everything from the California statehood stamp for the U.S. Postal Service to the paste that keeps the Head & Shoulders label stuck to the shampoo bottle in the shower, fell to a 52-week low of $42.25 on Wednesday before rallying to close at $44, up 63 cents, on the New York Stock Exchange.

The stock has slumped 40% year to date, compared with a 1.2% decline in the blue-chip Standard & Poor's 500 index.

"The stock continues to drift lower almost every day, but from what I can see there doesn't seem to be any change in the business," said Joel Tiss, an analyst with Lehman Bros. in New York. "This is a high-quality, profitable company with a long, healthy track record and little debt."

Indeed, most of the major Wall Street brokerages tracking the stock have upgraded it in recent months to "buy," though that hasn't stemmed the slide.

The latest recommendation came Tuesday when Merrill Lynch & Co. analyst Karen Gilsenan said she expects the stock to rise by almost half, into the low-$60 range, in coming months.

Avery, which has 1,000 employees in Southern California and 17,400 worldwide, clearly spooked investors in July, when it warned that revenue growth had slowed into the high-single-digit range. The company blamed inventory reductions by some customers.

But the stock's accelerated decline in recent weeks is unwarranted given the company's prospects, its fans argue.

Analysts believe investors lately are grouping Avery with other industrial companies that are expected to be hurt by several broad trends, including rising oil prices, the sinking euro currency--which makes U.S. goods more expensive in Europe--and the slowing U.S. economy.

Gilsenan said those concerns apply to many of the companies in the specialty chemicals industry, a group into which Avery is often lumped, but that "in the case of Avery, the reaction is overdone."

The weak euro, which fell to another record low Wednesday, may be some investors' biggest worry: About 30% of Avery's $3.8 billion in sales last year were in Europe, said Robert Calderoni, the company's chief financial officer.

Gilsenan, however, said that exposure is mitigated by Avery's strong cost controls.

Investors also may have overestimated any effect on the company's bottom line from the record surge in oil prices. Petroleum-based products represent less than 10% of the company's material costs, according to Calderoni.

"This is a very well-diversified company," said Tiss. "If any one of these trends turns against Avery, it should not be enough to throw them off track."

Calderoni concedes the company's frustration over its sagging stock price, noting that the stock's price-to-earnings ratio based on estimated 2000 earnings per share now is about 15, a historic low.

"But there is nothing changed in the fundamentals of our business or our prospects," Calderoni said.

He said the company continues to have strong cash flow. Return on equity, another key measure of a company's health, is 34%, in the top 10% of companies in the S&P 500 index.

What's more, Avery maintains the No. 1 position in many of its markets, often by huge margins. For example, it has 85% of the office label market.

The company's customers cut across multiple industries and markets, from consumers purchasing school supplies to auto makers applying coatings to vehicles to governments issuing postage stamps.

Though growth has slowed in some areas, Avery reported a 14% jump in net income to $72.8 million in the second quarter. Sales grew 7% to $993.4 million.

"We think that investors bailing out of this sector have pushed the pendulum past the point of reason," Calderoni said.

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