We have issued an updated research report on Nordson Corporation NDSN on Mar 28.
The company, with a market capitalization of $7.5 billion, currently carries a Zacks Rank #3 (Hold).
Certain growth drivers and headwinds that might influence Nordson have been discussed below.
Factors Favoring Nordson
Financial Targets: Over the long term (2018 to 2023), Nordson anticipates revenue growth to be roughly twice the global Gross Domestic Product percentage. It also predicts to improve its operating margin in excess of revenue growth percentage.
For fiscal 2019, strengthening end-markets and growth initiatives are likely to aid organic sales. Nordson predicts organic volumes to grow 3-5%, higher than 2.5% registered in fiscal 2018. Further, EBITDA and operating margins are predicted to increase 100-150 basis points year over year.
Acquisitions: Adding businesses to the portfolio has been working in Nordson’s favor. Buyouts of Clada Medical Devices in October 2018, and Sonoscan and PCP product lines of Infiniti Dosing o.m.s. in January 2018 are worth mentioning. These assets are now part of the company’s Advanced Technology Systems segment.
In the first quarter of fiscal 2019, acquired assets added 1% to the company's sales growth.
Shareholder-Friendly Policies: Nordson believes in rewarding shareholders through dividend payments and share buybacks. In the first quarter of fiscal 2019, the company paid dividends worth $20.2 million and bought back 856,000 shares for $102 million.
Notably, Nordson announced 17% hike in quarterly dividend rate in August 2018 and a $500-million share buyback program in September 2018. We believe that impressive financial performances in the quarters ahead are likely to enable the company to continue rewarding shareholders handsomely.
Factors Working Against Nordson
Share Price Performances & Earnings Estimate Revision: Market sentiments have been against Nordson, after the release of first-quarter fiscal 2019 (ended Jan 31, 2019) results on Feb 21. The share price has fallen 2.6% since then. The quarter’s results were weaker than expected, with negative earnings surprise of 18.6%.
Notably, the stock has gained 10.3% in the past three months, underperforming the industry’s growth of 17.1%.
Also, earnings estimates for the company have been lowered in the past 60 days. Currently, the Zacks Consensus Estimate for earnings is pegged at $1.61 for the second quarter of fiscal 2019 (ending April 2019) and $6.37 for fiscal 2019 (ending October 2019), reflecting decline of 1.2% and 1.8%, respectively.
Nordson Corporation Price and Consensus
Nordson Corporation Price and Consensus | Nordson Corporation Quote
Higher Costs and Forex Woes: Nordson’s selling and administrative expenses grew 1.7% year over year in the first quarter of fiscal 2019, which, in turn, adversely impacted profitability. Additionally, the company’s cost of sales increased 6.1% (CAGR), while selling and administrative expenses grew 5% (CAGR) in the last five fiscals (2014-2018). If unchecked, rise in costs and expenses can be detrimental to the company’s margins and profitability in the quarters ahead.
In addition, geographical diversity has exposed Nordson to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of fiscal 2019, forex woes adversely impacted sales by 2%.
In fact, the company believes that forex issues will persist in fiscal 2019, adversely impacting sales by 2%.
Long-Term Debt: Nordson’s long-term debt in the last five fiscals (2014-2018) increased 13.1% (CAGR). Long-term debt was $1,331.4 million at the end of first-quarter fiscal 2019, reflecting sequential growth of 3.6% and year-over-year increase of 5.8%. Moreover, interest expenses in the quarter increased 9.3% from the year-ago quarter.
We believe that further issuances are bound to increase the balance and if unchecked, will increase the company’s financial obligations and prove detrimental to profitability.
Also, Nordson is currently more leveraged than the industry. Its debt/capital ratio is currently at 0.5, higher than 0.4 recorded by the industry.
Stocks to Consider
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Sun Hydraulics Corporation SNHY and Roper Technologies, Inc. ROP. While DXP Enterprises and Sun Hydraulics currently sport a Zacks Rank #1 (Strong Buy), Roper carries 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 all the three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was a positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.