Nordson Corporation: Nothing Special Here

Summary

• Nordson Corporation has some redeeming qualities of its own for investors to enjoy, but valuation is not one of them.
• The company's shares appear pricey, even if we use projected figures for the current fiscal year.
• There likely are better prospects on the market for investors to consider at this time.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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One of the most interesting engineering companies on the market today is a firm called Nordson Corporation (NASDAQ:NDSN). With a special niche focus on the dispensing market for adhesives, polymers, and other related products, the firm fits in a very specific category, one in which it has created a sizable presence in. In recent years, financial performance from the enterprise has been a bit mixed but generally positive. Fortunately for investors, this year is looking up. More likely than not, the company will continue to see some expansion in the near term and that should help to drive shareholder value. Having said that, all of the data that I can see suggests that the enterprise is anything but cheap. If anything, it likely is slightly overvalued even if we assume that recent growth is indicative of a new normal for it.

A niche enterprise

Nordson is a difficult company to describe in concise terms. For the sake of accuracy, it would be best to allow management itself to define precisely what the company does. In short, it, “engineers, manufactures and markets differentiated products and systems used for precision dispensing, applying and controlling of adhesives, coatings, polymers, sealants, biomaterials, and other fluids, to test and inspect for quality, and to treat and cure surfaces”. With these operations, the company services various markets ranging from energy, to transportation, to construction, and more.

In fact, according to management, 27% of the company's overall sales ultimately go to manufacturers of electronics like semiconductor and water level packaging. It is also used in the manufacture of printed circuit boards and automotive electronics, to name just a few products. A further 26% of revenue goes to consumer non-durables like box sealing, baby diapers, and convenience food packaging. 22% of sales are ultimately to end-users in the medical space, while 14% are to end-users in the industrial space, and the remaining 11% go to other miscellaneous markets.

In all, about 55% of the company's revenue falls under its Industrial Precision Solutions segment. This segment focuses on adhesives, polymer processing solutions, and industrial coatings solutions. The remaining 45% of sales are dedicated to its Advanced Technology Solutions segment. This involves things like medical, electronic processing systems, test and inspection systems, and fluid management operations. You can really dig deep into all of the different applications. As an example, in the medical category, its technology is used in things like minimally invasive interventional delivery devices, catheters, and more.

*Taken from Nordson Corporation

In recent years, financial performance by the enterprise has been a bit mixed. After seeing revenue increase from $1.81 billion in 2016 to $2.26 billion in 2018, it then declined in 2019 and again in 2020. Last year, sales came in at $2.12 billion. So at least the decline was not significant. For the current fiscal year, the company has seen a bit of a boon. Sales of $1.76 billion in the first three quarters of 2021 imply a 12.8% increase over the $1.56 billion achieved in the first three quarters of 2020. While macroeconomic conditions and some return to normalcy following the worst of the COVID-19 pandemic might lead investors to fear that the company will eventually see a pullback, management is not so concerned. In fact, their current forecast is for sales to exceed $3 billion annually by 2025.

*Created by Author

It should come as no surprise to investors that as revenue has increased and decreased, so too has profitability. The company went from generating $271.84 million in net income in 2016 to $377.38 million in 2018. This then dropped in 2019 and 2020, ending last year at $249.54 million. As the chart above illustrates, operating cash flow has been more volatile, but EBITDA has followed a trajectory that is similar to what we saw with net income. This year, profitability is coming in strong. In the first three quarters of 2021, net income totaled $343.91 million. That is 48.8% higher than the $231.06 million generated the same time a year earlier. Operating cash flow increased from $309.96 million to $375.46 million. And EBITDA jumped from $405.35 million to $560 million.

*Created by Author

For the current fiscal year, management expects sales to come in at between $2.35 billion and $2.38 billion. Profits should total between $7.75 per share and $7.95 per share. At the midpoint, this implies profits of $456.20 million. No guidance was given for operating cash flow or EBITDA. However, in the chart below, you can see how operating cash flow has generally related to profits and how EBITDA has generally related to operating cash flow. So in my analysis, I simply excluded the 2020 fiscal year due to the fact that it appears to have been an outlier and I averaged up the multiples for the four years prior to that. Applying this to the net income figure expected for 2021 would give us operating cash flow of $561.13 million and EBITDA of $827.72 million.

*Created by Author

Based on this data, it appears as though the company is trading at a forward price to earnings multiple of 31.2 and at a price to operating cash flow multiple of 25.3. The cheapest the company looks is when we use the EV to EBITDA multiple. This gives us a reading of 18. Shares look significantly more expensive if we use the 2020 figures instead, with readings of 57, 28.3, and 26.4, respectively. To put this all in perspective, I decided to compare Nordson to the five highest-rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, the companies ranged from a low multiple of 13.6 to a high multiple of 33.6. In both the 2020 scenario and the 2021 scenario, four of the five companies were cheaper than our prospect. I then did the same thing using the EV to EBITDA multiple, ending up with a range of 6.8 to 22.4. The 2021 scenario resulted in four of our prospects being cheaper, while the 2020 scenario resulted in all five being cheaper.

*Created by Author

Company	Price / Operating Cash Flow	EV / EBITDA
Welbilt (WBT)	33.6	22.4
Dover Corporation (DOV)	20.1	17.7
Mueller Industries (MLI)	22.0	6.8
Standex International Corporation (SXI)	15.5	14.6
Mueller Water Products (MWA)	13.6	14.4

Click to enlarge

Takeaway

At this moment, it appears as though Nordson is experiencing something of a boon. If this holds and if management is accurate about where the business would be in the next few years, then shares could offer a decent amount of upside. Having said that, however, investors are being asked to pay a hefty premium to participate in this potential upside. I would feel more comfortable if the firm had a better track record for growth prior to the pandemic. But that is not the case. All things considered, I think shares look rather pricey. And while they may end up generating a positive return for investors, I have a hard time believing their returns would be greater than the broader market.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.