NDSN - Nordson Corporation: Supply Chain Optimization Resulting In Operational Excellence

2023-05-30 03:03:35 ET

Summary

• Nordson Corporation is a hold due to its moderate dividend, supply chain optimization, and overvaluation based on DCF figures.
• The company has achieved comparable performance to the S&P 500 over the past decade and offers a favorable dividend yield of 1.18%.
• Nordson's supply chain optimization strategy has improved inventory management, operational efficiency, and distribution network, positioning the company for long-term growth.

Nordson Corporation ( NDSN ) has exemplified continuous growth over the years, providing shareholders with consistent returns. I believe the company is currently a hold due to its moderate dividend, supply chain optimization, and overvaluation assuming my DCF figures.

Business Overview

Nordson Corporation is a global company that designs, manufactures, and markets products and systems for dispensing, applying, and controlling various fluids such as adhesives, coatings, polymers, sealants, and biomaterials. They have three segments: Industrial Precision Solutions, Medical and Fluid Solutions, and Advanced Technology Solutions.

The Industrial Precision Solutions segment focuses on dispensing, coating, and laminating systems for adhesives, liquids, and fibers used in disposable products and roll goods. They also provide automated adhesive dispensing systems for packaged goods industries, components and systems for thermoplastic and biopolymer materials, and product assembly systems for various applications. Additionally, they offer automated and manual dispensing products and systems for different materials and processes, including ultraviolet equipment for curing and drying.

The Medical and Fluid Solutions segment specializes in medical devices such as cannulas, catheters, and medical balloons. They also manufacture single-use plastic components, precision dispensers, minimally invasive delivery devices, and plastic molded syringes, cartridges, tips, and fluid connection components.

The Advanced Technology Solutions segment provides automated dispensing systems for fluid attachment, protection, and coating. They also offer gas plasma treatment systems for surface cleaning and conditioning. Additionally, they provide bond testing and automated inspection systems used in semiconductor and printed circuit board industries.

Nordson Corporation sells its products through a direct sales force, as well as distributors and sales representatives, reaching customers worldwide.

Nordson has a market capitalization of $12.58 billion and a healthy return on invested capital of 15%. Its stock has reached a 52-week high of $251.26 and a low of $194.89. Currently, the stock is priced at $220.82 with a P/E GAAP of 24.79. This places the stock close to its 200-day moving average of $226.33. When compared to its peers using a GAAP P/E ratio, Nordson's stock is positioned within a reasonable range.

Nordson Corporation also offers a favorable dividend yield of 1.18%, with a conservative payout ratio of 27.62%. This provides shareholders with a modest yet reliable income stream while allowing the company sufficient free cash flow to pursue expansion initiatives and make improvements within its core business.

Nordson Corporation has surpassed expectations in its Q2 2023 financial results, with earnings per share of $2.26, exceeding estimates by $0.14, and revenue of $650.17, surpassing expectations by $11.3. This performance demonstrates a year-on-year revenue growth of 2.3%, indicating Nordson's ability to outperform in a challenging economic environment. The company's success can be attributed to its focus on operational excellence, as it integrates effective strategies to enhance its core business operations and mitigate the impact of economic headwinds. This commitment to operational excellence has allowed Nordson to maintain consistent growth and successfully navigate through challenging market conditions. Additionally, the company has reconfirmed its previously issued full-year fiscal 2023 revenue guidance, anticipating 0% to 3% growth over the record fiscal year 2022. Furthermore, Nordson aims to narrow its adjusted earnings per diluted share to the range of $8.90 to $9.30 per share, indicating its commitment to delivering strong financial performance and value to its stakeholders.

Nordson Compared to the Broader Market

Nordson has achieved comparable performance to the S&P 500 over the past decade, considering dividends. This showcases the company's capacity to generate value for shareholders by efficiently leveraging its free cash flow to drive growth.

Supply Chain Optimization Resulting in Operational Excellence

To improve its effectiveness and responsiveness in serving consumers, Nordson has devised a supply chain optimization approach. The application of sophisticated logistics management and planning systems is one particular example of this method.

In order to optimize inventory levels, manufacturing schedules, and distribution networks, Nordson has made investments in reliable supply chain planning software. This software makes use of cutting-edge algorithms and data analytics. To produce an effective supply chain strategy, this program takes into account variables including demand projections, capacity for manufacturing, lead times, and transportation restrictions.

In its supply chain, Nordson has been able to reap a number of advantages by utilizing such cutting-edge technology. First off, the company has reduced surplus stock levels and minimized stockouts to improve inventory management. In order to guarantee that goods are accessible when needed while eliminating needless inventory holding expenses, Nordson uses supply chain planning software to precisely estimate demand and identify the ideal inventory levels at various stages of the supply chain.

Second, Nordson has been able to improve operational efficiency by streamlining its manufacturing processes thanks to the optimization of its manufacturing schedules. To create the best production plans, the supply chain planning system considers a number of variables, including capacity for production, availability of resources, and order priority. As a result, Nordson can fulfill orders more quickly and increase customer satisfaction by minimizing manufacturing bottlenecks, improving resource efficiency, and cutting lead times.

Additionally, Nordson was able to optimize its network of distribution centers because of its supply chain optimization strategy. To choose the most effective distribution routes and warehouses, the software takes into account variables including transportation expenses, delivery lead times, and consumer locations. As a result, Nordson's transportation expenses are reduced, delivery times are shortened, and the supply chain's overall responsiveness is improved.

I am confident that these enhancements will position Nordson to efficiently anticipate and fulfill customer demands, while also generating higher free cash flow through the reduction of excess inventory. This surplus cash can then be allocated toward exploring new expansion opportunities and fostering long-term growth for the company.

Analyst Consensus

According to analyst consensus, Nordson is highly recommended as a "buy". The company shows promising potential for returns, with an average one-year price target of $253.50, indicating a significant upside of 14.80%.

Valuation

Prior to formulating my assumptions and conducting a discounted cash flow analysis, I will utilize the Capital Asset Pricing Model to compute the Cost of Equity and Weighted Average Cost of Capital for Nordson. Taking into account the risk-free rate of 3.81% derived from the 10-year treasury yield, I have determined that the Cost of Equity for Nordson stands at 8.06%.

Based on the assumed Cost of Equity value, I have computed the Weighted Average Cost of Capital for Nordson to be 7.87%. This figure is below the industry average of 9.94% , indicating that Nordson has a relatively lower cost of capital compared to its industry peers.

Using a Firm Model Discounted Cash Flow analysis that considers Free Cash Flow to the Firm without Capital Expenditure, I have determined that Nordson is currently overvalued by 24%. This assessment is based on a fair value estimation of approximately $168.92. The calculation incorporated a discount rate of 7.87% over a 5-year period. Additionally, I anticipate that Nordson will continue to improve its core operations by implementing operational efficiencies, leading to gradual margin expansion in the coming years.

Risks

Supply Chain Disruptions: Nordson's ability to produce and distribute goods could be impacted by supply chain disruptions, including difficulties in the supply of basic supplies or components, transportation problems, or interruptions brought on by natural catastrophes or geopolitical events.

Regulatory and Compliance Risks: Nordson is subject to rules and compliance demands in the many jurisdictions in which it operates. The company may suffer financial and reputational repercussions as a result of regulatory changes, non-compliance with current regulations, or legal problems.

Conclusion

To summarize, I believe that Nordson is currently a hold due to the company's consistent dividend, supply chain optimization creating efficiencies, and overvaluation assuming my DCF figures.

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