Avery Dennison Corporation

March 20, 2015 Avery Dennison Corporation Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 09/26/2013 Current Price (03/19/15) $53.00 Target Price $56.00 SUMMARY DATA SUMMARY (AVY-NYSE) Avery Dennison s fourth-quarter 2014 earnings increased 30% year over year to $0.90 per share. The company expects adjusted earnings per share to range between $3.20 and $3.40 in fiscal 2015. While the Pressure Sensitive Materials and Retail Brandings segments are poised for long-term growth, near-term headwinds remain in the form of weak market demand in the U.S and Europe. Moreover, given Avery Dennison s significant exposure to international operations, currency volatility remains a concern. However, the company s cost reduction initiatives and further share repurchases will boost earnings. Hence, we reiterate our Neutral recommendation on Avery Dennison with a target price of $56. 52-Week High $54.64 52-Week Low $41.28 One-Year Return (%) 6.83 Beta 1.26 Average Daily Volume (sh) 575,278 Shares Outstanding (mil) 90 Market Capitalization ($mil) $4,770 Short Interest Ratio (days) 5.62 Institutional Ownership (%) 89 Insider Ownership (%) 1 Annual Cash Dividend $1.40 Dividend Yield (%) 2.64 5-Yr. Historical Growth Rates Sales (%) -0.9 Earnings Per Share (%) 0.9 Dividend (%) 12.0 using TTM EPS 17.0 using 2015 Estimate 16.2 using 2016 Estimate 14.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Office Sppl&Frm Zacks Industry Rank * 212 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,499 A 1,552 A 1,505 A 1,584 A 6,140 A 2014 1,550 A 1,616 A 1,560 A 1,605 A 6,330 A 2015 1,491 E 1,562 E 1,530 E 1,587 E 6,170 E 2016 6,348 E Note: 2013 Quarterly figures will not add up due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.59 A $0.71 A $0.69 A $0.69 A $2.68 A 2014 $0.65 A $0.80 A $0.77 A $0.90 A $3.11 A 2015 $0.70 E $0.89 E $0.86 E $0.83 E $3.28 E 2016 $3.68 E Note: 2013 Quarterly figures will not add up due to rounding off Projected EPS Growth - Next 5 Years % 7 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW Headquartered in Pasadena, California, Avery Dennison Corporation (AVY) produces pressure-sensitive materials, and a variety of tickets, tags, labels and other converted products. Avery operates over 180 manufacturing and distribution facilities in more than 50 countries. Its products are sold under the Avery, Avery Dennison, Avery Graphics and Fasson brands. Its clientele is spread across the U.S., Europe, Asia, Latin America and other regions. Avery runs three major business units: The Pressure-Sensitive Materials unit (PSM) (74% of total revenue in 2014) primarily manufactures and sells pressure-sensitive roll materials, graphics and reflective materials, and water and solventbased performance polymer adhesives and engineered films. The Retail Branding and Information Solutions (RBIS) unit (25%) provides a wide variety of information and brand management solutions for apparel manufacturers, retailers, distributors and industrial customers on a worldwide basis, including tag and label design and printing, heat transfers, patches and specialty trim, eco-friendly solutions, packaging and security solutions, RFID (radiofrequency identification) solutions, supply chain solutions and Web services as well as barcode printers, software solutions, molded plastic fasteners and application devices. Vancive Medical Technologies unit (1%) is a producer of medical products and solutions. This business manufactures a wide range of pressure-sensitive adhesive products for surgical, wound care, ostomy and electromedical applications. These products are sold primarily to medical supply and device manufacturers and healthcare providers. Equity Research AVY Page 2

REASONS TO BUY Avery Dennison expects adjusted earnings per share to range between $3.20 and $3.40 in fiscal 2015. Management expects growth of 3% to 9% from fiscal 2014, despite significant headwind from currency translation. Organic sales growth is projected to range from 3% to 4% in 2015. Avery expects to progress persistently through 2018 and projects organic sales growth in the range of 4% to 5%. Operating margin is expected to range between 9% and 10%, while adjusted EPS growth will be in the range of 12% to 15%. For the PSM segment, Avery targets 4 5% organic sales growth over the 2013 2018 period, aided by market share gains, progress in emerging markets, accelerated growth in graphics, and performance tapes and innovation-led advancement in label and packaging material. The RBIS segment is expected to deliver organic sales growth in the range of 4% to 5% by 2018, outperforming the industry growth rate of 1 2% on the back of product introductions and growth in RFID. Avery targets the RFID industry to grow from approximately 3 billion units in 2013 to 9 billion units by 2018. In 2014, Avery returned approximately $481 million to shareholders $125 million as dividends and the remaining through the repurchase of approximately 7.4 million shares for $356 million. In April, the board declared a quarterly cash dividend of $0.35 per share, reflecting a 21% increase over the previous quarterly dividend. As of the fiscal 2014-end, approximately $600 million worth of shares remained for repurchase under its Jul 2013 and Dec 2014 board authorizations. Further share repurchases and dividend hikes are likely to improve investor sentiment. Avery initiated a new restructuring program in 2014, primarily related to the consolidation of certain European operations. This resulted in approximately 1,420 headcount reduction. Avery anticipates approximately $49 million in annualized savings from these restructuring actions, of which approximately $14 million was realized in 2014 and the rest will be realized through 2016. Combining carryover benefits from 2014 with new actions taken in 2015, Avery estimates that restructuring initiatives will contribute roughly $60 million pretax or about $0.45 a share in 2015. With relentless focus on cost-cutting and portfolio optimization, Avery s earnings growth trajectory should continue over the next few years. REASONS TO SELL The Retail Branding Information Solutions segment is being affected by weakness in retail apparel demand in the U.S. Slowdown in China also remains a concern. Furthermore, the strength exhibited by European retailers & brands during most of 2014 has dampened in the fourth quarter. A major portion of the slowdown in Europe reflects lower-than-expected sales of RFID products. RFID revenue was down by more than 10% on an organic basis in the fourth quarter due to choppy demand. International operations contributed approximately 76% to Avery Dennison s net sales during 2014. This makes the company vulnerable to political and economic changes in the regions where it operates as well as to the impact of fluctuations in foreign currency exchange and interest rates. Weak market demand in North America continues to be a headwind for the PSM segment. Moreover, demand in Europe remains soft reflecting economic challenges in the region. Equity Research AVY Page 3

RECENT NEWS Avery Dennison (AVY) Tops Q4 Earnings on Cost Savings Feb 2, 2015 Avery Dennison Corporation reported adjusted earnings of $0.90 per share in the fourth quarter of 2014, up 30% from $0.69 earned in the year-ago quarter, driven by its cost savings initiatives. The results beat the Zacks Consensus Estimate of $0.80, a positive earnings surprise of 13%. Including restructuring costs and other items, earnings from continuing operations were $0.75 per share in the quarter, compared with $0.45 in the year-ago quarter. Total revenue edged up 1.3% to $1,605 million from $1,584 million in the prior-year quarter. Revenue, however, fell short of the Zacks Consensus Estimate of $1,608 million. On an organic basis, sales grew 1% year on year. Cost of sales in the reported quarter rose 1.9% year over year to $1,190 million. Gross profit inched down 0.3% to $415 million while gross margin contracted 40 basis points (bps) to 25.9%. Marketing, general and administrative expenses were $285 million versus $299 million in the year-ago quarter. Adjusted operating profit increased 10.6% to $130 million. Adjusted operating margin improved 70 bps to 8.1% on a year-over-year basis. Segmental Performance Total revenue in the Pressure-sensitive Materials segment increased 2% to $1,177 million. Label and Packaging Materials sales rose in the low-single digits. Sales for Graphics, Reflective and Performance Tapes increased in the mid-single digits. Adjusted operating profit increased 12% to $125 million in the quarter compared with $111 million in the year-ago quarter. Total revenue from Retail Branding and Information Solutions segment declined 3% to $406 million from $417 million in the year-earlier quarter due lower volume in Europe and North America. The segment s adjusted operating income dipped 12% to $27.6 million. Vancive Medical Technologies segment reported net sales of $22.5 million, up 29% from $17.4 million in the year-ago quarter. The segment, however, reported an adjusted operating loss of $0.4 million, narrower than the year-ago quarter loss of $2.1 million. Financial Updates As of fiscal 2014-end, Avery Dennison had cash and cash equivalents of $227 million, down from $352 million as of fiscal 2013-end. Cash provided by operating activities for fiscal 2014 was $374 million compared with $320 million in the prior fiscal. Long-term debt of the company decreased to $945 million as of fiscal 2014-end from $950.6 million as of fiscal 2013-end. Debt-to-capitalization ratio increased to 52% as of fiscal 2014-end from 40.8% as of fiscal 2013-end. The company repurchased 7.4 million shares in fiscal 2014 at an aggregate cost of $356 million. Cost Reduction Activities In 2014, Avery Dennison realized approximately $35 million in savings from restructuring. The company incurred restructuring costs of approximately $66 million, of which $55 million represents cash charges. Equity Research AVY Page 4

Fiscal 2014 Performance Avery Dennison reported adjusted earnings per share of $3.11, up 16% year over year, surpassing the Zacks Consensus Estimate of $3.02. Including one-time items, earnings from continuing operations stood at $2.62 compared with $2.44 in the prior fiscal year. Revenues increased 3% year over year to $6.33 billion, missing the Zacks Consensus Estimate of $6.35 billion. Fiscal 2015 Outlook Avery Dennison expects adjusted earnings per share to range between $3.20 and $3.40 in fiscal 2015. Management expects growth of 3% to 9% from fiscal 2014, despite significant headwind from currency translation. Equity Research AVY Page 5

VALUATION Currently, shares of Avery Dennison Corporation are trading at 16.2x our 2015 EPS estimate of $3.28. The company s current trailing 12-month earnings multiple is 17.0, compared with the 13.1x average for the peer group and 18.3x for the S&P 500. Over the last five years, shares of Avery have traded in a range of 9.1x to 19.6x trailing 12-month earnings. The stock is trading at a 26% premium to the industry average, based on forward earnings estimates. We have maintained our Neutral recommendation on Avery, which indicates that it will perform in line with the overall market. Our target price is $56 or 17.1x our 2015 EPS estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Avery Dennison Corporation (AVY) 16.2 14.4 8.8 9.6 17.0 19.6 9.1 Industry Average 12.8 11.3 9.6 7.2 13.1 60.5 8.6 S&P 500 16.7 15.6 10.7 14.5 18.3 18.4 12.0 United Stationers Inc. (USTR) 11.8 10.1 13.0 9.2 12.3 16.1 9.4 ACCO Brands Corporation (ACCO) 10.4 9.6 7.0 5.4 9.4 19.8 7.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Avery Dennison Corporation (AVY) 4.6 4.6 1.5 22.5 0.9 2.6 8.7 Industry Average 2.0 2.0 2.0 13.5 0.2 1.3 8.5 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research AVY Page 6

Earnings Surprise and Estimate Revision History Equity Research AVY Page 7

DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AVY. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1133 companies covered: Outperform - 15.2%, Neutral - 75.0%, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AVY Page 8