Hiroshi Watanabe
In the final days of 2021, I believed that the re-rating of shares of Nordson Corporation (NASDAQ:NDSN) had been perhaps a bit too much. The company had seen a strong 2021, with momentum set to continue in 2022, all while the company announced nice additional acquisitions, with the balance sheet still revealing sufficient firepower to finance more deals.
Despite all of this and a great track record, it was the combination of a 30-times earnings multiple and historically high margins, which was a bit demanding and worrying of course.
Former Take
Nordson is a sort of hidden gem, a business with a great track record of creating long-term value. The dividend aristocrat is a premier industrial technology company focusing on precision dispensing, fluid control and related processes. The company generated $2.1 billion in sales in 2020, on which it posted a very impressive $567 million EBITDA number. These revenues and profits were generated from all major geographic regions across the globe, serving clients in end markets like consumer non-durables, medical applications and electronics and industrial markets.
Having observed these qualitative traits in the past, I became a shareholder back in 2015, having averaged a position in the $50s at the time. Little could have I imagined that shares would rise to $250 by year-end 2021. This was a steep valuation for a business set to earn around $8.75 per share in 2021, with leverage seen at an amount equal to generated EBITDA, both around half a billion.
The company guided for 2022 sales at $2.5-$2.6 billion, with earnings per share implicitly seen around $10.50-$11.00 per share. I found myself in doubt, as valuations were very full already, yet leverage was low, and the long-term track record was very compelling, prompting me to stick to this long-term winner.
A Modest Pullback
Shares of Nordson ended up peaking at $270 late last year. They briefly fell below the $200 mark in June amidst a pullback in general markets, as shares have rebounded to $230 by now.
In February of this year, Nordson posted first quarter results with revenues of $609 million coming in 16% ahead of last year. All the growth was driven by dealmaking, with the original performance being flat as earnings (both GAAP and non-GAAP) came in a few pennies above the $2 per share mark.
The company updated the full year guidance, calling for 7-10% sales growth and 14-18% adjusted earnings per share growth, both metrics have inched up a bit from the original guidance. Second quarter sales, as released in May, revealed just 8% sales growth, albeit that a 15% increase to $2.43 per share is pretty solid. With the backlog exceeding the billion mark, the company now sees earnings up 18-21% on the back of 8-9% sales growth. This marks a further increase at a time when many peers were cutting the guidance. Net debt came down to $359 million already and with EBITDA coming in at $392 million in the first six months of the year, leverage ratios come in below 0.5 times.
Ahead of the release of the third quarter result, Nordson announced its next deal, taking advantage of this strong balance sheet, announcing its intention to acquire CyberOptics Corporation (CYBE) for $54 per share, or an enterprise valuation of around $380 million. This is a bolt-on deal for a company the size of Nordson, with a current market capitalization of just over $13 billion, with net leverage seen up to 1 times EBITDA.
CyberOptics generates approximately $100 million in revenues, adding 3D optical sensing technology, and is set to add some $20 million in EBITDA. This marks a premium valuation but actually comes in just below that of Nordson. More so, the 18.5 times EBITDA multiple is set to fall to 14.5 times if we factor in synergies, revealing that $6 million in synergies are projected down the road.
Nordson is scheduled to release its next earnings report after the market close on August 22.
And Now?
With earnings power basically trending close to $9.25 per share here, valuation multiples come in around 25 times, still quite a steep multiple of course, as the first half of the year is quite solid by all means. Even more so, the company will see sales grow by around 4% following the latest deal, and even in that case, leverage ratios come in at just 1 times EBITDA.
Hence, the very premium valuation by the end of 2021 has come down a bit as shares are down less than 10% since that period of time, as the company has seen a solid first half of 2022, albeit that some macro pressure might hurt Nordson down the road as well.
Amidst all of this, I think that the appeal has increased a tiny bit since the end of last year, but my overall conclusion remains the same, despite a solid half year and nice bolt-on deal. Nordson is a premium and quality name, trading at an equivalent premium and quality valuation, as I do not see imminent appeal here, yet I remain a very confident long-term holder.
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