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Nordson (NDSN) Up 8.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
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A month has gone by since the last earnings report for Nordson (NDSN). Shares have added about 8.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Nordson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Third-Quarter Fiscal 2018 Highlights

Nordson reported flat bottom-line results for third-quarter fiscal 2018 (ended Jul 31, 2018).

Adjusted earnings in the reported quarter were $1.60 per share, in line with the Zacks Consensus Estimate. On a year-over-year basis, the company's earnings declined 10.1% from the year-ago tally of $1.78.

Decline in Organic Volumes Affects Revenues

In the reported quarter, Nordson's net sales were $581.2 million, decreasing 1.4% year over year. The poor performance was due to 3% decline in organic volumes, partially offset by 1% forex gains and 1% benefit from acquired assets. Moreover, the top line lagged the Zacks Consensus Estimate of $590 million by 1.5%.

At the quarter end, backlog was $428 million, up 16% year over year.

On a regional basis, revenues, sourced from the United States, increased 4.7% year over year to $191.5 million. Revenues generated from operations in Japan declined 31.6% to $28.4 million while that from the American operations decreased 6.5% to $38.96 million. Sales in Europe improved by 12.6% to $150.7 million and that in the Asia Pacific declined 9.4% to $171.7 million.

The company reports its top-line results under three segments, namely, Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. A brief discussion on the segmental performance in the fiscal first quarter is provided below:

The Adhesive Dispensing Systems segment's revenues totaled $244.7 million, increasing 4.9% year over year. Results were driven by 3.4% volume growth and 1.5% forex gains.

Advanced Technology Systems' revenues were $266.6 million, down 8.2% year over year. The fall was due to 8.9% decline in volumes, partially offset by 0.7% forex gains.

Revenues generated from Industrial coating systems grew 6.5% to $69.9 million. Volumes grew 5.7% and foreign currency movements had a positive impact of 0.8%.

Margin Weak on Higher Expenses

In the quarter under review, Nordson's cost of sales declined 0.9% year over year to $260.8 million. It represented 44.9% of net sales versus 44.6% in the year-ago quarter. Selling and administrative expenses increased 7% year over year while as a percentage of net sales expenses were 31.8% versus 29.3% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter under review were $163.4 million, decreasing 10.1% year over year. Operating profits declined 11.7% year over year to $135.6 million while the margin came in at 23.3% versus 26% in the year-ago quarter.

Balance Sheet & Cash Flow
 
Exiting the fiscal third quarter, Nordson had cash and marketable securities of $266.8 million, up 71.15 from $155.9 million in the previous quarter end. The company's long-term debt increased 15.9%, sequentially, to $1,521.4 million.

In the fiscal third quarter, the company generated net cash of $130.6 million from its operating activities, reflecting year-over-year growth of 68.5%. Capital spent on the addition of property, plant and equipment decreased 42% to $12.9 million. Adjusted free cash flow was $117.8 million, increasing 106.1% year over year.

During the reported quarter, the company paid dividends of approximately $17.4 million to its shareholders.

Outlook

For fourth-quarter fiscal 2018 (ending October 2018), Nordson anticipates sales to be flat year over year to decline 4%. Organic volume growth is predicted to range from    3% fall to 1% growth. Acquisition gains will likely add 1% sales growth while foreign currency movements will have an adverse 2% impact.

Operating margin will likely be 22% while EBITDA is expected to be $143-$155 million. EBITDA margin is predicted to be roughly 26%. The tax rate is estimated to be 25%. GAAP earnings are expected to be $1.38-$1.54 per share.

For fiscal 2018, Nordson anticipates organic revenues to grow roughly 2%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Nordson has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nordson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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