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We issued a research report on Nordson Corporation NDSN on Aug 22.
This machinery company, with a market capitalization of approximately $7.8 billion, currently carries a Zacks Rank #3 (Hold).
Below, we briefly discussed the company’s potential growth drivers and possible headwinds.
Factors Favoring Nordson
Solid Business Portfolio: Nordson operates under three reportable segments — Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. These segments cater to a diverse customer base in the packaging, non-woven, polymer processing, products assembly, electronic systems, fluid management, test and inspection, container coating, curing and drying systems, liquid finishing, and powder coating markets. Such business diversity is a boon for the company, as weakness in any segment or markets can be offset by gains in others.
Nordson anticipates remaining a premier industrial technology company in the long term (2018 to 2023). Revenues are predicted to grow roughly twice the global Gross Domestic Product percentage and operating margin is anticipated to come in excess of revenue growth percentage.
Strengthening Portfolio Through Inorganic Activities: Acquisition is one of the favored growth options for Nordson. A few important buyouts made in the past quarters include ACE Production Technologies (January 2017), Plas-Pak Industries (February 2017), InterSelect GmbH (February 2017) and Vention Medical’s Advanced Technologies business (March 2017). These buyouts have added vigor to the company’s Advanced Technology Systems segment. It’s worth noting that ACE Production Technologies and InterSelect are projected to deliver mid- to high-single-digit growth over the next several years.
In January 2018, Nordson acquired Sonoscan, Inc. and Nordson ASYMTEK, the company’s subsidiary, and added Infiniti Dosing’s PCP product lines to its portfolio. These two buyouts are strengthening the company’s Advanced Technology Systems segment. In third-quarter fiscal 2018, acquired assets added 1% to the company’s sales growth while similar contribution is anticipated for the fiscal fourth quarter.
Shareholder-Friendly Policies: Nordson believes in rewarding its shareholders handsomely through dividend payments and share buybacks. In the past six fiscal years (2012-2017), rewards totaling $1 billion have been paid to shareholders. It’s worth noting here that dividends, amounting to $52.1 million, have been distributed in the first nine months of fiscal 2018 (ended July 2018). Moreover, the company hiked its quarterly dividend rate by 17% this August, making this the 55th consecutive annual dividend increase.
Further improvements in the company’s profitability in the future will enable it to reward its shareholders handsomely.
Factors Working Against Nordson
Financial Performance & Outlook: Nordson’s earnings of $1.60 per share in the third quarter of fiscal 2018 were in line with the Zacks Consensus Estimate. On a year-over-year basis, the bottom line decreased 10.1% while the top line declined 1.4% due to 3% fall in organic volumes, partially offset by 1% forex gain and 1% synergistic gain from acquired assets.
Nordson predicts net sales to be flat to decline 4% year over year in fourth-quarter fiscal 2018, comparing unfavorably with 13% growth in sales in the year-ago comparable quarter. Projection for net sales includes the assumption of 3% fall to 1% growth in organic volumes. Demand for dispense products, primarily meant for use in the electronics market, of the Advanced Technology Systems segment is predicted to be soft. Furthermore, the demand for cold material products, meant for use in the automotive markets, is estimated to be lower.
In the past seven days, earnings estimates on the stock have been decreased for both fiscal 2018 and 2019. Currently, the Zack Consensus Estimate is pegged at $5.99 for fiscal 2018 and $6.68 for fiscal 2019, reflecting a decline of 0.2% and 0.1% from the respective seven-day-ago tallies.
Further, the company’s shares yielded 3.1% return in the past month, underperforming 5.2% gain recorded by the industry it belongs to.
Adversities Arising From Rising Costs: Nordson is grappling with the adverse impacts of rising cost of sales and expenses. The cost of sales in the last five fiscals (2013-2017) moved up 6.5% (CAGR) while selling and administrative expenses increased 4.6%. Further, in the first nine months of fiscal 2018, the company’s cost of sales increased 13.7% over the year-ago comparable period while selling and administrative expenses grew 11%.
We believe, if uncontrolled, higher costs and operating expenses will prove detrimental to the company’s margins, and profitability.
Huge Debts Raise Concerns: Nordson’s long-term debts in the last five fiscals (2013-2017) increased 14.3% (CAGR). The same has grown 15.9%, sequentially, to $1,521.4 million at the end of third-quarter fiscal 2018. Likewise, the total debt-to-total equity has increased from 74.2% in fiscal 2013 to 137.8% in fiscal 2017 while stood at 109.3% at the end of third-quarter fiscal 2018. A highly leveraged balance sheet can inflate the company’s financial obligations and hurt its profitability. It’s worth noting here that interest expenses grew by 51.2% year over year in the first nine months of fiscal 2018.
Stocks to Consider
Some better-ranked stocks worth considering in the industry are Altra Industrial Motion Corp. AIMC, Chart Industries, Inc. GTLS and Barnes Group Inc. B. While Altra Industrial Motion sports a Zacks Rank #1 (Strong Buy), both Chart Industries and Barnes Group carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for each of these stocks improved for the current year and the next year. The average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 29.36% for Chart Industries and 6.88% for Barnes Group.
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