NDSN - Nordson: Resorting To M&A After A Challenging Year

2023-06-29 18:12:24 ET

Summary

• Nordson Corporation has been a great long-term value creator, combining organic growth with savvy M&A.
• Amidst a growth standstill this year, the company has resorted to M&A efforts to boost reported growth.
• Whilst I still like the long-term promise of the Nordson business, I am resorting to a neutral stance in the medium term.

In August of last year, I concluded that quality prevails in the case of shares of Nordson Corporation (NDSN) . This came as the company had seen a solid first half of 2022, amidst challenging macro conditions, and after the quality business had announced its next bolt-on deal.

While the valuation was very demanding and premium, quality prevails over time. This quality has not been demonstrated over the past year, but with continued savvy dealmaking, Nordson appears to invest into the future. This still makes it a solid long-term play, even as the near-term appeal is not evident.

Premier Industrial Technology Play

Nordson is a premier industrial technology company (and a dividend aristocrat) that focuses on precision dispensing, fluid control and related processes. While operating in generally to be considered as niche markets, the business has a decent size, associated impressive niche margins and caters a diversified customer group.

To put these claims into numbers, Nordson generated just over $2 billion in sales in 2020, accompanied by EBITDA margins in excess of 25%, with revenues generated across major geographic regions in the world. Its end markets being served are quite diversified, and include non-durable consumer goods, medical applications, electronics and industrial markets.

In fact, I have been a very long-term owner, as I stepped in at $50 in 2015. I was surprised by the fact that shares ran to levels as high as $250 by the end of 2021, a huge multiple for a business set to earn nearly $9 per share. This came in part as the company outlined an impressive 2022 guidance with sales seen at $2.5-$2.6 billion, on which earnings might top the $10 per share mark. Still a demanding valuation. I found myself in doubt, as I recognized the quality of the business, including a low leverage position.

After the 2021 peak, shares consolidated in the $200s, as they traded at $230 last August as the company actually increased the full year outlook after a strong first quarter. The company, furthermore, announced a $380 million deal for CyberOptics Corporation. With a prevailing $13 billion equity valuation, this really was a bolt-on deal. After all, the 3D optical technology business will add about $100 million in sales.

Amidst this deal and all the moving factors, I decided to not alter my long position, being a keen long-term investor in the shares.

Trading Stagnant

Since August of last year, shares of Nordson have traded in a $200-$250 range, as shares have currently moved towards the higher end of the range at $242, marking very modest gains since August.

In December of last year, Nordson reported its 2022 results, with revenues increasing by nearly 10% to $2.59 billion. Amidst strong operating leverage, the company managed to grow operating earnings to $702 million, with net profits of $513 million working down to an $8.81 per share number. Adjusted for mostly a pension settlement charge, earnings came in at $9.43 per share.

Net debt of $575 million was very modest, certainly as adjusted EBITDA surpassed the $800 million mark. That was good to see, as the fiscal 2023 guidance was a bit mixed, with sales growth seen between 1 and 7%, and adjusted earnings seen flattish between $8.75 per share and $10.10 per share.

In fact, after a tougher first quarter the company cut the full year sales guidance to just 0-3% growth, with earnings now seen between $8.75 and $9.50 per share. This earnings guidance was narrowed to $8.90-$9.30 per share upon the release of the second quarter results . At that time net debt has risen to $819 million, mostly due to the closing of the CyberOptics deal, with EBITDA trending close to $800 million a year.

With nearly 58 million shares trading at $240, the company now commands a $13.9 billion equity valuation, or $14.7 billion enterprise valuation.

A Substantial Deal

In June, Nordson announced its next deal, as it reached an agreement to acquire Italian-based ARAG in an EUR 960 million deal, at just over a billion dollars at prevailing exchange rates. ARAG makes products like fluid components (including nozzles, pumps and filters), smart components and control systems.

With ARAG founded in the 1970s, the deal is set to add EUR 155 million in sales, indicating that about a 6 times sales multiple has been paid, which is largely in line with Nordson's own valuation. With an EUR 58 million EBITDA contribution, it is evident that the business could post sky-high margins.

This deal will bolster pro forma net debt to about $1.8 billion here, substantial with the own business posting EBITDA around $800 million. Factoring in the addition of the deal, net debt will come in at around 2 times EBITDA, coming in a bit high for Nordson on a traditional basis.

Moreover, earnings are stuck around $9 per share, and while they might see a bit of accretion (not from the get-go in all likelihood, given the financing costs), I am now a bit more cautious here. After all, amidst a tougher 2023, shares trade at a mid-twenty earnings multiple, while a very strong balance sheet has now taken on some debt.

Hence, I remain impressed with the long-term quality of the Nordson business, but after the consolidation and somewhat struggles over the past year, I see no reason to alter a current neutral, but long-term upbeat, stance.

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