Wall Street labels Avery a loser in Dennison deal; manufacturer's stock hits 52-week low.

Wall Street labels Avery a loser in Dennison deal; manufacturer's stock hits 52-week low

After Avery International Inc. announced fiscal third-quarter earnings plunged 30 percent, the price of the Pasadena-based company's common stock hit new 52-week lows on consecutive days on the New York Stock Exchange.

To be sure, the stock market in general has been falling. Yet even last Tuesday when the Dow Jones Industrial Stock Average rebounded 32.67 points, Avery common hit a lower low of $17 a share after the depressed earnings on modestly higher sales were announced the prior Thursday.

Avery common at $17 had plummeted 49 percent from the 52-week high of $33.25 a share. Indeed, not since 1987 had Avery's stock price been as low.

The company, built on self-adhesive labels and tapes, had been on a fast-growth track. Net sales grew at a 10-year compound rate of 12 percent to $1.73 billion last year and net income by 14 percent to $86.5 million or $1.96 a share.

But that pace slowed last year when net sales rose by 10 percent, earnings by 11 percent. Earnings growth, of course, turned negative this year.

"Avery's period of rapid growth appears to have passed," declared Michael T. Molloy, a New York analyst who follows Avery at Dean Witter Reynolds Inc., who in March recommended selling Avery.

Molloy altered his recommendation last May to a tepid "hold" for longer-term investors but retained his sell recommendation for near-term investors. Causing his change was the announcement of an agreement in principle for acquisition of Dennison Manufacturing Co., a leading manufacturer of self-adhesive products, through exchange of 1.12 shares of Avery for each Dennison share.

The acquisition of Dennison, which last year recorded net earnings of $29.4 million on net sales of $770.9 million, would enlarge Avery net on a pro forma basis for 1989 to $114.5 million on $2.49 billion of sales. However, pro forma net per share would sag to $1.84 for Avery from the reported $1.96.

Promised a quarterly dividend hike to 18 cents a share from the current 16 cents if the Dennison deal went through, Avery shareholders approved it Sept. 11. Dennison shareholders likewise approved the proposal, which had been under discussion and negotiation by the managements of both companies since 1987.

Analysts, such as Molloy, figured Avery management would be able to shrink Dennison's costs and the combined companies would emerge a stronger competitor, for Avery was judged stronger in the West and Dennison in the East. The acquisition also would take out one of Avery's biggest competitors, Dennison, and result in improved profit margins, remarked J. Jeffrey Cianci, a New York analyst who follows Avery at Bear Stearns & Co.

However, analysts also expected Avery's near-term results would be impacted by merger expenses, dilution, and softness in certain market segments. In fact, that was what happened when Avery announced its results for the fiscal third quarter ended Aug. 31:

Net income plunged to $13.3 million from $18.9 million for the like 1989 quarter; net per share plummeted to 30 cents from 43 cents as net sales increased to $448.6 million from $422.7 million. Part of the earnings fall was ascribed to $3.7 million of merger expenses, which pared net per share by 8 cents.

In addition, though, marketing, general and administrative expense jumped up 14 percent to $110.1 million, representing 25 percent of net sales, from the $96.4 million of last year's like quarter, representing 23 percent of sales then. Three reasons were given by Wayne H. Smith, vice president and treasurer:

* Higher marketing expenses for new product introductions. An example, Smith said, is Avery's new desktop laser printer for labels.

* Writeoffs of receivables related to the bankruptices of three large French customers of Avery's specialty diaper tape business. More diaper writeoffs are expected for the fiscal fourth quarter, Smith allowed.

* Foreign currency exchange losses.

In reporting the results Sept. 20, Chairman Charles D. Miller blamed lower operating profit largely on "a week worldwide industrial economy, particularly in the automotive and retail department store markets." He cited, too, "significant economic declines in Canada, Australia and the United Kingdom.

"Strong performances of the company's roll papers, roll films and office products businesses in the United States could not offset these major influences," Miller lamented. Commenting on the outlook, he said Avery expects weakness in the worldwide economies to continue in the period immediately ahead.

As a result of these factors, Cianci of Bear Stearns projected Avery earnings of $1.60 to $1.70 a share (after merger expenses, $1.80 before merger expenses) for fiscal 1990, $1.90 for next year, compared with $1.96 last year.

Since the federal government has not signed off on the proposed Dennison deal, Dean Witter's Molloy gave his projections two ways: $1.75 for Avery alone this year, $1.95 next year; $1.60 for the combined company this year, $1.85 next year.

"A lackluster fourth quarter is coming up," Molloy said. Indeed, given all the writeoffs that are coming, investors may have to wait until next year's second quarter for some good news, he said.

Believing, though, the Dennison deal will accrue "significant benefits," Molloy declared: "Values now are starting to become somewhat compelling."

Referring to Avery's already deeply depressed stock price, he contended the downside is "extremely limited." That means, Molloy concluded, it now is "too late to sell," but it also is "too early to buy."

Avery's stock price will be "at least $20 to $22 a share in a year," projected a more sanguine Cianci at Bear Stearns, an increase of at least 17 percent.