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Diversification Aids Nordson, Weak Electronic Market to Hurt

Zacks Equity Research

We issued an updated research report on Nordson Corporation NDSN on Jan 20.

The company manufactures and distributes products and systems designed to dispense, apply and control adhesives, coatings, sealants, and others. It currently has a market capitalization of $9.8 billion.

Factors Favoring Nordson

Top-Line Tailwinds: A solid customer base — operating in transportation, nonwovens, packaging, electronics, medical, energy, building and construction, and other industries — are a boon for Nordson. In fiscal 2019 (ended October 2019), no single customer accounted for 10% or more of the company’s sales. It is worth mentioning here that Nordson has three segments, including Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems.

Also, its presence in multiple countries — including the United States, the Netherlands, the People's Republic of China, Germany, Mexico, Ireland, Israel, Thailand and the U.K. — has strengthened its growth prospects.

For fiscal 2020 (ending October 2020), the company’s growth initiatives as well as strengthening medical products and consumer non-durable products’ end markets will likely boost the top line. Organic sales in the fiscal year are anticipated to increase 1-3% year over year.

The Zacks Consensus Estimate for Nordson’s revenues is pegged at $2.24 billion for fiscal 2020 and $2.37 billion for fiscal 2021 (ending October 2021), suggesting year-over-year growth of 1.9% and 6%, respectively.

Acquired Assets: The company has been investing in acquisitions over time. In fiscal 2019, buyouts boosted Nordson’s sales by 1%. The same is likely to increase fiscal 2020 sales by 20 basis points (bps).

Notably, the company acquired Clada Medical Devices in October 2018 and Optical Control GmbH in July 2019. Both buyouts have been strengthening Nordson’s Advanced Technology Systems segment.

Rewards to Shareholders: The company is committed toward rewarding shareholders handsomely through share buybacks and dividend payments. In fiscal 2019, it bought back $115 million shares and paid out dividends totaling $82 million.

It is worth mentioning here that the company received the board of directors’ approval for a $500-million share repurchase program in September 2018. Also, its quarterly dividend rate was hiked by 9% in August 2019.

Factors Working Against Nordson

Top-Line Woes: In fourth-quarter fiscal 2019, organic sales of the company’s Advanced Technology Systems segment were adversely impacted by weakness in electronic end markets.

It expects the softness in electronics end markets to continue in the near term.

Higher Costs and Expenses, Forex Woes: Nordson’s cost of sales increased 2% year over year in fourth-quarter fiscal 2019 (ended October 2019). Notably, its cost of sales increased 5.4% (CAGR) in the last five fiscal years (2015-2019).

We believe that a hike in the cost of sales, if uncontrolled, can affect the company’s margins and profitability.

Additionally, international operations have exposed Nordson to risks stemming from geopolitical issues and unfavorable movements in foreign currencies. In fourth-quarter fiscal 2019, adverse impact of foreign currency movements lowered sales by 1%.

The company predicts forex woes to adversely impact sales by about 30 bps in fiscal 2020.

Share Price Performance and Earnings Estimate Revision: Market sentiments have been against Nordson. Its stock price has increased 10.8% in the past three months compared with the industry’s growth of 11.3%.




Furthermore, the company’s earnings estimates for fiscal 2020 and fiscal 2021 have been lowered in the past 60 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $6.24 for fiscal 2020 and $7.03 for fiscal 2021, reflecting declines of 2.7% and 5% from the respective 60-day-ago numbers. The company currently carries a Zacks Rank #4 (Sell).

Nordson Corporation Price and Consensus

 

Nordson Corporation Price and Consensus

Nordson Corporation price-consensus-chart | Nordson Corporation Quote

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Parker-Hannifin Corporation PH and Cintas Corporation CTAS. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), Parker-Hannifin and Cintas 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 these stocks have improved for the current year. Further, positive earnings surprise for the last four quarters, on average, was 17.67% for DXP Enterprises, 5.29% for Parker-Hannifin and 8.50% for Cintas.

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