Avery’s Quiet Shift From Materials to Margins — TradingView News

Introduction

Avery Dennison is often seen as a stable compounder in packaging and labeling, but that view may be outdated. Beneath the surface, the company is transitioning from a classic materials supplier to a technology-driven enabler of item-level digital tracking. Its RFID platform, developed over two decades, is now embedded across retail, logistics, healthcare, and increasingly industrial supply chains. But what’s often missed is how this transition shifts the revenue structure, elevates pricing power, and creates an embedded growth engine with significantly higher throughput per unit of volume.

Over the past decade, Avery Dennison has delivered strong absolute shareholder returns, driven primarily by margin expansion, disciplined reinvestment, and steady capital returns rather than multiple expansion. Free cash flow growth and buybacks, rather than valuation re?rating, have accounted for the bulk of value creation. That profile has made Avery a reliable long?term compounder, but it has also reinforced the market’s tendency to view the company through a materials lens rather than as a business whose unit economics are quietly changing.

What the Company Actually Earns Money From Today

At the consolidated level, Avery Dennison still looks unremarkable. Revenue growth has been uneven, reflecting soft apparel demand, inventory normalization, and cautious consumer spending. On the surface, this appears to justify a valuation anchored to mid-cycle materials earnings.

Inside the business, however, the sources of profit are shifting. The Materials Group remains the larger revenue contributor. It supplies labels and graphics tied to packaged goods, healthcare, logistics, and apparel. This business is operationally strong but economically mature. Margins are stable, capital intensity is meaningful, and long-term growth tracks global consumption rather than innovation.

The Solutions Group, which houses RFID, operates under a different set of constraints. RFID demand is driven by operational necessity, not discretionary spending. Retailers adopt it to reduce shrink, improve inventory accuracy, and lower labor costs. Once implemented, usage becomes recurring, not optional. Reorders follow throughput, not fashion cycles.

That distinction has become visible in recent results. While apparel volumes have remained under pressure globally, RFID revenues have continued to grow, supported by broader rollouts at existing customers rather than headline customer wins. This is a subtle but important shift. It suggests that RFID is no longer being tested, it is being institutionalized. As a result, incremental earnings growth is increasingly coming from a segment with higher margins, lower capital requirements, and more predictable reorder behavior than the legacy materials business.

The Market Still Looks at the Wrong Driver

Despite this evolution, Avery Dennison continues to be valued as if its earnings power will always be governed by labeling volumes and packaging cycles. Multiples remain aligned with specialty materials peers rather than businesses undergoing an internal mix shift toward higher-return activities.

This matters because valuation anchors behavior. When a company is priced like a mature materials producer, investors implicitly assume that margin expansion will be limited, reinvestment returns will normalize, and growth will track GDP plus modest share gains.

RFID challenges those assumptions.

RFID margins already exceed the group average, and they continue to improve as scale increases and manufacturing efficiency rises. Capital requirements grow far more slowly than revenue. Most importantly, adoption expands customer dependence without expanding the physical footprint of the business in proportion.

Yet the current share price does not reflect a scenario in which RFID becomes a dominant contributor to earnings growth over time. Instead, it assumes that RFID remains additive but not transformative.

That creates asymmetry. If RFID adoption merely continues at its current pace, consolidated margins can drift higher without requiring a cyclical rebound in materials volumes. If adoption accelerates, the valuation framework begins to look outdated.

Valuation

Avery Dennison currently trades at ~21 forward earnings and ~16.5 EV/EBITDA, roughly in line with its five-year historical average despite a notable improvement in business mix. For a company with structurally higher returns on capital, modest capital intensity, and improving through-cycle stability, this isn’t obviously cheap, but it’s not excessive either.

The critical lens is not whether the stock is undervalued in the traditional sense, but whether its valuation still reflects its legacy as a materials company. In that framing, Avery looks modestly miscategorized. As RFID adoption scales, now approaching 20% of total revenue, growing 1520% annually, and offering meaningfully higher revenue density per square meter, the company is shifting toward a more technology-enabled, asset-light profile.

Yet its valuation continues to cluster with legacy peers like Amcor (EV/EBITDA ~11) and Packaging Corp of America (~12), rather than higher-multiple logistics enablers or industrial tech firms with embedded systems. It doesn’t need to trade at Zebra Technologies (EV/EBITDA ~25) levels to be compelling, but even a modest rerating to ~1819 EBITDA as RFID surpasses 2530% of total revenue would imply upside, particularly given buyback support and steady margin expansion.

Meanwhile, free cash flow yield sits at ~4.2%, with visible capacity for expansion through working capital efficiency and mix shift. Capital expenditures remain modest, and return on invested capital, still above 17%, including acquisitions, supports confidence in long-term reinvestment economics.

In short, Avery may not offer explosive revaluation potential, but it does offer a credible path to improving economics per share. Its valuation is less about deep mispricing and more about patient recognition of a business quietly upgrading its quality, without the market fully adjusting its lens.

Where RFID is Already Showing Up, and Where Next

RFID technology accounted for roughly $800 million of Avery Dennison’s revenue in 2022, representing just under 15% of its total $9 billion top line. Yet this segment has been growing at 20%+ annually, with management guiding for $1.5 billion in RFID revenue by 2025. That’s a faster pace than any other unit, and crucially, RFID products carry gross margins that are estimated to be 57 points above the corporate average, given their embedded software, specialized substrate, and higher ASP per tag.

What this means economically is a slow reshaping of Avery’s earnings mix. If RFID reaches $2.53 billion by 2030, a reasonable outcome based on current penetration rates and vertical expansion into healthcare and logistics, it could represent 2530% of revenue, but potentially 3540% of operating profit. That shift matters because it implies structurally higher ROIC and a more resilient profit base, especially as the rest of the business remains tied to more commoditized pressure-sensitive materials.

Unlike standard substrate volumes, which scale with square meters, RFID growth is tied to item-level proliferation. One warehouse client ordering 100,000 tagged units generates more margin than an entire roll of classic labeling. And with new contracts emerging in pharma and aviation logistics, the total addressable market for intelligent labeling could plausibly exceed $10 billion globally over the next decade, well above current analyst models.

The strategic question is no longer whether RFID is viable. It’s how much of the future margin base it will command. If Avery captures even 20% of the intelligent labeling market by 2035, it could be operating a business with 1.52 the profit dollars on only modest volume growth, driven by substrate quality, not quantity.

Capital Allocation: How Cash Is Being Used Now, Not How It Is Described

Avery Dennison’s capital allocation over the last decade has been defined by a quiet but consistent logic: grow internally where margins scale, acquire selectively to expand technology and channel reach, and return capital to shareholders in a disciplined, valuation-sensitive manner.

Since 2013, the company has deployed more than $2.5 billion in net M&A, most notably acquiring Smartrac’s RFID business in 2020 and Vestcom in 2021, which expanded its footprint in intelligent labels and retail shelf-edge labeling respectively. While both deals came at premium multiples, Avery’s intent was not financial engineering but long-term capability expansion, especially in RFID inlays, software integration, and custom printing.

What sets Avery apart is how these acquisitions are absorbed: rather than sprawling integrations, the company leans on operational discipline to fold in assets with minimal disruption. Gross margins have expanded from ~30% in 2013 to nearly 33.5% in 2023, and operating margins have risen over the same period despite inflationary input pressures, a sign that capital has been put to productive use.

On the return side, Avery has bought back roughly 6.4% of its shares over the past three years and returned over $1.9 billion to shareholders through dividends and repurchases since 2020. Yet what’s notable is not just the quantum, but the timing. Buybacks were slowed in late 2022 as valuation climbed and macro uncertainty grew, and then resumed more aggressively in late 2023 as pricing normalized. This sensitivity to valuation echoes the company’s reputation for conservative financial management.

Avery’s dividend has also compounded steadily, growing at a 78% CAGR over the last decade, with a payout ratio that rarely breaches 40%. This ensures retained earnings are reinvested into product development, automation upgrades, and working capital rather than over-distributed. Capex has averaged $250300 million/year, typically 4.55% of revenue, with a growing tilt toward intelligent label infrastructure.

Recent activity also reflects this strategic balance: in 2023, Avery invested in expanding its RFID production capacity in Mexico and began piloting new sustainability-linked label substrates to prepare for European regulatory shifts. Rather than relying on big-bang capital moves, the company tends to reinvest in small, compounding improvements that enhance throughput, reduce waste, or shorten lead times.

The net effect is a capital program that is neither flashy nor underweight, but calibrated. Avery’s ROIC, excluding goodwill, has held above 14% even through inflationary cost spikes. That figure matters more than yield or buyback headlines: it shows a company deploying capital in ways that drive long-term owner value, without overstretching.

Ownership

While Avery Dennison rarely attracts the spotlight reserved for megacap technology narratives, its shareholder base tells a more deliberate story. Several respected institutional investors have increased exposure in recent quarters, suggesting growing conviction in the company’s cash flow durability and capital discipline despite muted interest in the broader packaging sector.

Most notably, Balyasny Asset Management initiated a new position of over 462,000 shares, a meaningful entry given the firm’s selective positioning. Gotham Asset Management, led by Joel Greenblatt (Trades, Portfolio) , increased its stake by more than 60%, while Tudor Investment Corp expanded its position sharply as well. These moves point less to thematic enthusiasm and more to valuation?aware positioning in a business with improving economics.

Other large holders, including Geode Capital and AQR Capital, have maintained sizable, stable positions, reinforcing the view that Avery remains attractive to quantitatively disciplined investors. While Dimensional Fund Advisors and Renaissance Technologies (Trades, Portfolio) trimmed their holdings, both remain shareholders, suggesting portfolio rebalancing rather than a loss of conviction.

Management’s own signal comes primarily through capital allocation rather than insider buying. Over the past three years, the company has repurchased roughly 6.4% of its outstanding shares while maintaining steady dividend growth. Buybacks have been paced conservatively, accelerating during valuation weakness and slowing during periods of uncertainty, a pattern consistent with long?term stewardship rather than financial engineering.

Taken together, Avery’s investor base reflects the nature of the business itself: quiet, valuation?aware, and focused on incremental returns rather than momentum. It is not a stock owned for headlines, but one accumulated by investors who understand how margins, asset efficiency, and reinvestment discipline translate into long?term value.

Risks

For a business built on pricing stability and operational efficiency, the biggest risks facing Avery Dennison aren’t obvious shocks, they’re creeping structural shifts that chip away at long-term economics if left unchecked.

The most immediate concern is input cost volatility. Avery’s raw material base, including paper, film, and adhesive chemicals, remains heavily exposed to commodity cycles and energy-linked transportation costs. While the company has historically passed through inflation with pricing mechanisms and contract structures, the lag between cost increases and price resets can squeeze margins, particularly in lower-growth quarters. The inflation wave of 202223 tested these levers, and although Avery defended gross margins relatively well, the operating margin compression revealed the limits of pricing power in certain segments.

A second concern is labeling commoditization in mature markets. While Avery remains a global leader in pressure-sensitive labels, market saturation in North America and Western Europe creates long-term pressure on both pricing and volume growth. Competitors in emerging markets, some state-backed, others operating with structurally lower labor costs, continue to scale up. If innovation and service differentiation slow, Avery risks losing pricing power in the very categories that once funded its expansion.

There’s also strategic risk in the capital allocation balance. Avery has leaned heavily into acquisitions over the past five years, spending over $2.4 billion in M&A since 2019, including deals in high-value RFID and industrial labeling. While these investments support long-term optionality, the margin profile of acquired businesses varies significantly. A misstep here, especially if integration synergies are delayed or customer adoption slows, could dilute returns on invested capital. The pivot to high-tech labeling is promising, but not riskless.

Lastly, investors should remain mindful of demand cyclicality, especially in Avery’s industrial and apparel end-markets. A slowdown in retail inventory restocking, for example, can ripple through label orders with surprising speed. Likewise, Chinese demand, once a growth engine, has become more erratic, with macro pressure on exports and local manufacturing output affecting Avery’s regional volumes.

Conclusion

Avery Dennison isn’t a misunderstood rocket ship, and that’s precisely what makes it interesting. Its shift from substrate supplier to technology enabler has quietly improved its margin structure, lowered its capital intensity, and created an embedded base of recurring RFID demand. At the same time, management has paired this operational evolution with a consistently disciplined capital allocation strategy, pulling back on repurchases when conditions are uncertain and leaning in when valuation compresses.

This doesn’t point to an explosive rerating. The stock already trades at a modest premium to packaging peers, and RFID growth is now widely recognized by the market. But that doesn’t diminish the owner economics. Avery’s returns are increasingly driven by margin expansion, not sales growth; by pricing power, not just volume; and by throughput efficiency rather than flashy multiples. It’s a business growing more durable beneath the surface, the kind that doesn’t need narrative hype to keep compounding.