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Nordson Boosts Growth Potential With Buyouts, Risks Remain


We issued a research report on Nordson Corporation NDSN on Jan 12. Acquisitions of meaningful businesses have been strengthening the company’s business opportunities in the Advanced Technology Systems segment. Rising costs, high debts and woes from international diversification remain issues.

It currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $8.5 billion.

In the last three months, Nordson’s shares have yielded 20.9% return, outperforming 7.5% gain of the industry it belongs to.

Below we briefly discuss the company’s potential growth drivers and possible challenges.

Factors Favoring Nordson

Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time enhanced Nordson’s growth opportunities by allowing it easy penetration into unexplored markets and offering diverse products to its customers. In fourth-quarter fiscal 2017 (ended Oct 31, 2017), the acquired assets added 10% to sales growth.

Recently, Nordson acquired Sonoscan, Inc. while its subsidiary — Nordson ASYMTEK — added the progressive cavity pump (PCP) product lines of Infiniti Dosing o.m.s. to its portfolio. Both the acquired assets will be integrated with the company’s Advanced Technology Systems segment. While the Sonoscan buyout is anticipated to strengthen the company’s test and inspection business, the PCP product line acquisition will expand Nordson’s reach in the dispensing and dosing markets.

Prior to these deals, Nordson had acquired ACE Production Technologies, Inc. in January 2017, Plas-Pak Industries, Inc. and InterSelect GmbH in February and Advanced Technologies business of Vention Medical in March. All these assets have strengthened its businesses under the Advanced Technology Systems segment. ACE Production Technologies and InterSelect are projected to deliver mid-to-high single digit growth over the next several years.

Attractive Shareholders’ Return: Nordson has a sound track record of rewarding its shareholders through lucrative dividend payments. Notably, the company paid dividends of $63.8 million in fiscal 2017. In August 2017, it gifted its shareholders an 11% hike in the quarterly dividend rate.

We believe such disbursements are reflective of its strong cash position and capital allocation policy. Also, impressive financial performance in the quarters ahead will enable the company to continue rewarding its shareholders handsomely through dividend increments.

Impressive Near-Term Projections & Long-Term Targets: For first-quarter fiscal 2018, Nordson anticipates benefiting from healthy product demand in the electronics and medical end markets of the Advanced Technology segment. Sales in the quarter are anticipated to increase in the range of 30-34% year over year, including 15-19% from organic volume growth, 11% from acquired assets and 4% from positive impact of foreign currency movements.

Over the long term (2018 to 2023), the company anticipates revenue growth to be roughly twice the global GDP percentage while aims to improve its operating margin in excess of revenue growth percentage.

Factors Working Against Nordson

Poor Valuation: On a P/E (TTM) basis, Nordson looks overvalued compared with the industry with respective tallies of 27.5x and 26.9x in the last three-month period. Also, the stock is currently trading above the median P/E multiple of 23.7x. This makes us cautious on the stock.

Increasing Costs and Huge Debt Levels: Nordson is suffering from the risks of escalated costs and expenses. In fiscal 2017, the company’s cost of sales increased 13.8% year over year while operating expenses jumped 12.6%. We believe, if unchecked, rising costs and expenses can hurt the company’s margins in the quarters ahead.

Also, a high-debt level can lead to heightened financial obligations, posing serious threats to the company’s financial health. Exiting the year, the company’s long-term debt was approximately $1.3 billion.

Challenges Arising From Geographical Expansion: Nordson operates in more than 35 countries, with manufacturing facilities primarily in the United States, the People’s Republic of China, Germany, Mexico, the Netherlands, Thailand and the United Kingdom. In fourth-quarter fiscal 2017, the company generated 68.1% of its revenues from its international operations.

We believe that uncertainties in the economic growth of the countries served will severely impact Nordson’s businesses. Geographical diversification has exposed it to risks arising from foreign currencies movements and geopolitical issues.

Earnings Estimates & Key Picks

Nordson’s earnings estimates for fiscal 2018 have been revised upward by eight analysts in the last 30 days while that for fiscal 2019 have been raised by two and lowered by one. Currently, the Zacks Consensus Estimate for the stock stands at $6.29 for fiscal 2018 and $6.87 for fiscal 2019, representing growth of 8.4% and 7.3% from their respective estimates 30 days ago.

Some stocks worth considering in the industry are Colfax Corporation CFX, Atlas Copco AB ATLKY and EnPro Industries, Inc. NPO. While Colfax sports a Zacks Rank #1 (Strong Buy), both Atlas Copco and EnPro Industries carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Colfax’s earnings estimates for 2018 improved in the last 60 days. The company pulled off an average positive earnings surprise of 5.31% in the last four quarters.

Atlas Copco performed well in the last quarter, with a positive earnings surprise of 4.65%. Also, earnings expectations for 2018 have improved over the past 60 days.

EnPro Industries’ earnings estimates for 2018 were revised upward in the last 60 days.

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