We use P/E as our primary valuation methodology, assigning a 18x target multiple to our $9.82 NTM EPS estimate to derive a target price of $177; this a modest discount to the S&P 500. Historically, AVY’s trading NTM P/E multiple has been in line with the S&P’s trading multiple (average 1.03x over the past 10 years), and during periods of lower earnings growth, the stock has traded at a discount of up to -20% the S&P 500.

We use EV/EBITDA and FCF yield as supporting valuation methodologies; our 19x NTM P/E target multiple implies a 11.8x target multiple to $1.47B estimated NTM EBITDA and 5.2% '25 FCF yield.

Potential Secular Headwinds in Apparel – Even after COVID cases begin to fall, there is concern that remote learning and working initiatives may create secular headwinds for apparel demand. We believe these concerns are overdone as AVY has greater exposure to athleisure (low priced, high volume items) than formalwear (high priced, low volume items). Furthermore, we expect retailers to continue to trade-up to higher priced RFID tags. We believe COVID (brick-and-mortar closures, increased e-commerce) further complicated supply chains, thus increasing the importance of RFID.

Consolidating Customer Base – In recent years, private-equity players have been actively consolidating label converters. While the market remains highly fragmented (top 4 converters <15% share), in time, AVY could potentially lose pricing power if consolidation continues.

Emerging Market / FX Risks – AVY operates in more than 60 foreign countries and derives approximately two-thirds of its revenues from outside the US. Therefore, earnings generated overseas can be impacted by exchange rate fluctuations when translated into USD. Furthermore, the company could face political and economic risks inherent in the foreign countries in which it operates.

Commodity Risk – The company purchases significant amounts of raw materials, primarily paper, adhesives, resin, and other specialty chemicals. Many of these input costs have been highly volatile in recent years. Should AVY be unable to pass along higher costs or see deflation in any raw materials, our estimates would be at risk.

If the impact on the company from any of these factors proves to be greater or less than we anticipate, the stock will either outperform or underperform our target price.