Rating Update: Stock Rating C-Neutral (1/11/24)-Nordson Corp (NDSN).

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BUSINESS

Nordson Corporation engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids worldwide. It operates through two segments, Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS). The IPS segment provides dispensing, coating, and laminating systems for adhesives, lotions, liquids, and fibers to disposable products and roll goods; automated adhesive dispensing systems used in packaged goods industries; components and systems used in the thermoplastic melt stream; and product assembly systems for use in paper and paperboard converting applications, and manufacturing roll goods, as well as for the assembly of plastic, metal, and wood products.
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INVESTMENT RATING

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NDSN is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Nordson has a current Value Trend Rating of C (Low Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Nordson has a poor Appreciation Score of 18 but a good Power Rating of 77, triggering the Low Neutral Value Trend Rating.

Nordson’s stock is selling significantly above targeted value. The current stock price of $261.69 compares to targeted value 12 months forward of $159.
Nordson’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
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Nordson has a Power Rating of 77. (This good Power Rating indicates that NDSN has a better chance of achieving attractive investment performance over the near to intermediate term than all but 23% of companies in the universe.)
Factors contributing to this good Power Rating include: the recent trend in NDSN’s earnings estimates has been favorable; recent price action has been slightly favorable; and the General Industrial Machinery & Equipment, NEC comparison group is currently in a modestly favorable position.

INVESTMENT PROFILE

Nordson’s financial strength is high. Financial strength rating is 88.
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Relative to the S&P 500 Composite, Nordson Corp has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that NDSN is lower risk. All factors are relative strengths. Nordson’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. NDSN has low market capitalization.

CURRENT SIGNALS

Nordson’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Nordson’s current technical position is very strong. The stock price is in a 9.6 month up move. The stock has appreciated 29.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Nordson Corp (NASDAQ: NDSN) has benefited from minimal positive changes in fundamentals: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
For its first fiscal quarter (ending January 31), Nordson Corp (NASDAQ: NDSN) has reported E.P.S. of $1.92 compared to $1.82 a year ago. E.P.S. were $8.63 for the latest four quarters through January 31 versus $8.66 for the same period a year ago.
On 2/21/24, Nordson Corp (NASDAQ: NDSN) stock declined slightly by -0.9%, closing at $261.69. Moreover, this decline was accompanied by above average trading volume at 144% of normal. Relative to the market the stock has been strong over the last nine months but has declined -1.2% during the last week.

CASH FLOW

In 2023, Nordson experienced a very significant reduction in cash of -$47.8 million (-29%). Sources of cash were much lower than uses. Cash generated from 2023 EBITDA totaled +$819.0 million. Non-operating uses consumed -$32.2 million (-4% of EBITDA). Cash taxes consumed -$28.0 million (-3% of EBITDA). Re-investment in the business amounted to -$1,565.7 million (-191% of EBITDA). On a net basis, debt investors provided +$942.9 million (+115% of EBITDA) while equity investors received -$183.8 million (-22% of EBITDA).
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Nordson’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Nordson Peer Group. In most years, Nordson was in the third quartile and lower quartile. Currently, Nordson is below median at -4% of EBITDA (-$32.2 million).

Nordson’s Cash Taxes, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by a similar trend for the Nordson Peer Group. In most years, Nordson was in the second quartile and top quartile. Currently, Nordson is upper quartile at -3% of EBITDA (-$28.0 million).

Nordson’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nordson Peer Group. (Since 2021 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Nordson was in the second quartile and top quartile. Currently, Nordson is substantially below median at -191% of EBITDA (-$1,565.7 million).

Nordson’s Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Nordson Peer Group. (Since 2021 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Nordson was in the lower quartile and top quartile. Currently, Nordson is above median at +115% of EBITDA (+$942.9 million).

Nordson’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Nordson Peer Group. In most years, Nordson was in the second quartile and third quartile. Currently, Nordson is slightly above median at -22% of EBITDA (-$183.8 million).

Nordson’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Nordson Peer Group. In most years, Nordson was in the third quartile and second quartile. Currently, Nordson is substantially below median at -6% of EBITDA (-$47.8 million).
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Nordson’s Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Nordson Peer Group. (Since 2021 Cash, %Revenue has experienced a very sharp decline.) In most years, Nordson was in the lower quartile and third quartile. Currently, Nordson is lower quartile at +4%.

PROFITABILITY

Nordson’s return on equity has eroded very significantly since 2014. The current level of 18.8% is 0.88X the low for the period and is -31.2% from the high.
This very significant erosion was due to small negative trend in pretax operating return supported by very strong negative trend in non-operating factors.
The productivity of Nordson’s assets declined over the full period 2014-2023: asset turnover has suffered a strong overall downtrend.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend that sharply accelerated from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Nordson’s return on equity is at median (18.8%) for the four quarters ended October, 2023.
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Operating performance (pretax return on assets) is slightly below median (11.7%) reflecting asset turnover that is at the lower quartile (0.50X) and pretax margin at the upper quartile (23.4%).
Tax “keep” rate (income tax management) is at median (79.2%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is above median (2.02X).

GROWTH RATES

Overall, Nordson’s growth rate has slowed considerably in recent years.
Nordson’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 5.2% per year.

Total asset growth has been 8.9% per year.

Annual E.P.S. growth has been 10.0% per year. (More recently it has been 18.7%.)

Equity growth has been 15.2% per year. (More recently it has been 11.5%.)

Nordson’s consensus growth rate forecast (average of Wall Street analysts) is 29.0% — substantially above the average of the historical growth measures.
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Relative to the Nordson Peer Group, Nordson’s historical growth measures are generally third quartile. Equity growth (15.2%) has been upper quartile. Total asset growth (8.9%) has been at median. E.P.S. growth (10.0%) has been slightly below median. Revenue growth (5.2%) has been at the lower quartile.

In agreement with this pattern, consensus growth forecast (29.0%) is upper quartile.
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PRICE HISTORY

Over the full time period, Nordson’s stock price performance has been variable and quite good. Between April, 2013 and February, 2024, Nordson’s stock price rose +277%; relative to the market, this was a +21% gain. Significant price move during the period: 1) January, 2016 – December, 2017: +142%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 4.6% is slightly above median relative to the S&P 500 Composite.
In addition to being slightly above median relative to S&P 500 Composite, current annual total return performance through January, 2024 of 4.6% is below median relative to Nordson Corp Peer Group.

Current 5-year total return performance of 15.3% is substantially above median relative to the S&P 500 Composite.
Through January, 2024, with substantially above median current 5-year total return of 15.3% relative to S&P 500 Composite, Nordson’s total return performance is at median relative to Nordson Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NDSN’s overall valuation is quite high. The highest factor, the ratio of enterprise value/assets, is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/revenue is upper quartile. Price/earnings ratio is above median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is above median.

Relative to Nordson Peer Group, NDSN’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is at the upper quartile. Price/equity ratio is at median. Ratio of enterprise value/assets is slightly below median. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. The lowest factor, the price/earnings ratio, is below median.
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Nordson has a large value gap compared to the median. For NDSN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 6.39X to 5.60X. If NDSN’s ratio of enterprise value/revenue were to fall to 5.60X, its stock price would be lower by $-37 to $225.
For NDSN to achieve upper quartile valuation relative to the Nordson Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 6.39X to 6.52X. If NDSN’s ratio of enterprise value/revenue were to rise to 6.52X, its stock price would increase by $6 from the current level of $262.

VALUE TARGETS

NDSN is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Nordson’s current Price Target of $170 represents a -35% change from the current price of $261.69.
Nordson’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 18, the high Power Rating of 77 results in an Value Trend Rating of C.
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Nordson’s current Price Target is $170 (+8% from the 2023 Target of $157 but -35% from the 02/21/24 price of $261.69). This slight rise in the Target is the result of a +12% increase in the equity base and a -3% decrease in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 20.9% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, steady decline between 2015 and 2023. The current forecast is well below the 2015 peak of 31%.

PTR’s growth forecast is 9.0% — slightly below our recent forecasts. Forecasted growth exhibited a modest, erratic decline between 2015 and 2023. The current forecast is below the 2015 peak of 12%.

PTR’s cost of equity forecast is 11.5% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is below the 2018 peak of 13.9%.
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At Nordson’s current price of $261.69, investors are placing a positive value of $167 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 18.3% versus a cost of equity of 10.4%.
PTR’s 2025 Price Target of $170 is based on these forecasts and reflects an estimated value of existing assets of $128 and a value of future investments of $41.

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