Nordson Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Nordson is an innovative precision technology company that develops a collaborative growth framework to deliver to its global industrial, medical and tech customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nordson Corporation is a global leader in precision dispensing, fluid management, and related technologies, with a history dating back to 1954. The company’s products are utilized in a wide variety of industries, including packaging, electronics, medical, transportation, and consumer goods. Nordson’s innovative technologies focus on applying materials with precision, helping their customers with fluid dispensing, coating, curing, and surface treatment solutions.

Nordson’s strategy is centered on organic growth with investments in new products and innovative technologies and targeted acquisitions that add complementary products or capabilities.

Revenue Distribution

Nordson operates across three primary segments:

  • Industrial Precision Solutions (IPS): The largest segment by revenue; providing precision dispensing and fluid management systems used in manufacturing processes to apply adhesives, coatings, sealants, and other materials in a variety of industrial applications. Key end markets include packaging, nonwovens, and electronics.
  • Medical and Fluid Solutions (MFS): Focuses on dispensing systems, components, and medical devices that are used in precision fluid management for medical, life science, and industrial purposes. It includes drug delivery and other critical applications.
  • Advanced Technology Systems (ATS): Specializes in test, measurement, and inspection systems for electronics and medical devices, along with process equipment for materials such as plastics, metals, composites, and other advanced materials.

Geographically, around 55% of revenue is derived from the Americas, 28% from Europe, and 17% from Asia Pacific.

Several key trends influence Nordson’s business:

  • Increased Automation: Manufacturers are adopting more automated processes to improve efficiency and reduce costs, driving demand for Nordson’s advanced dispensing and fluid-handling systems.
  • Globalization: The company has a global presence, with its revenues spread among various regions of the world; thus is also affected by global economy.
  • Technological Innovation: Innovation is key to maintain its technology edge.
  • Sustainability: Companies are becoming more concerned with minimizing waste and improving resource efficiency leading to interest in precision dispensing systems.
  • Acquisitions: Mergers and acquisitions are frequent in the industries.

Competitive Landscape

Nordson faces competition from various companies, depending on the specific product lines and industry segments.

  • The industry can be very competitive.
  • The overall industrial equipment industry is fragmented.
  • The company’s strengths lie in its long-term market positions in specific applications or industries.
  • The company faces direct competitors in certain product categories.
  • Also has strong competition in many end-market segments.
  • There is also competition from new and innovative entrants.

Companies like Nordson can establish and maintain its position if it can offer the best combination of technologies, performance, and customer service.

Differentiators

Nordson is differentiated by:

  • Precision Technology: They sell high-precision products, backed up by expertise in precision fluid delivery.
  • Diverse Portfolio: The company offers a wide range of products and solutions catering to various industries.
  • Global Reach: Strong presence across different geographic regions.
  • Innovation Focus: A commitment to R&D, and investments in new technologies.
  • Strong Customer Relationships: The company is well-known for building long-term, collaborative relationships.

Financials In-Depth

Nordson consistently highlights its disciplined approach to capital deployment with focus on organic growth initiatives, strategic acquisitions, and shareholder return.

Revenue and Profitability

  • Revenue Growth: Over the past several years, Nordson has demonstrated robust revenue growth, with sales increasing in its fiscal year 2023 as seen in their 10K report. This growth is driven by a combination of factors: strong organic growth, contributions from acquired businesses and growth in end markets.
  • Profitability: The company maintains strong profitability as shown in their reports. Operating margins have remained strong, as the benefits from operational efficiencies, cost cutting initiatives, and disciplined pricing have driven bottom-line results.
  • Gross margin: Is pretty good at roughly 50%.
  • Net Margin: Is on the low end, roughly 11%. Can’t be a moat based on net margin.
  • Strong operating margins, especially compared with other manufacturing companies.
  • Return on invested capital (ROIC): A metric that has historically varied between 15-25%. The company targets ROIC as a metric to drive value. However, note that ROIC might be overstated because of the company excluding goodwill.

Liquidity and Capital Structure

  • Strong Balance Sheet: The company boasts a strong balance sheet, characterized by ample cash reserves, and a manageable debt load. Current ratio shows a good level of cash that can cover its current liabilities.
  • Credit Ratios are also quite reasonable.
  • Debt-to-Equity Ratio has been historically around 0.65 to 0.8, meaning debt accounts for roughly 40-45% of the company’s capital structure. It seems that the company does not use leverage aggressively.
  • Share Repurchase: The company has been consistently repurchasing shares to return capital to shareholders, indicating financial stability.
  • Solid Free Cash Flow: Which is used for capital allocation decisions.
  • Reasonable cost of capital, which is consistent with its industry peer groups.

Moat Analysis: 3 / 5

Nordson exhibits elements of an economic moat, but not a wide moat.

  • Intangible Assets: They benefit from strong brand name, especially in their high-precision and complex products, like dispensing and fluid management technologies, which allows them to charge premium.
  • Switching costs: Customers face high costs to change between different fluid delivery systems because that involves extensive re-training and equipment modifications.
  • Scale and Cost Advantage: While having a large distribution network, they also have production and manufacturing advantages in some sectors, which gives them some cost advantages.
  • Niche market economics: They tend to be the go-to provider for specialized technologies.

Justification for a 3/5 rating:

  • The company’s wide distribution networks and proprietary technologies form a narrow moat.
  • However, the increasing complexity of the global manufacturing environment makes competition ever-present. The competitive advantages, although real, are constantly under threat.
  • A narrow-moat rating reflects that the moat may not last for decades, but will provide a competitive advantage for some time to come.

Risks to the Moat and Business Resilience

There are several risks to Nordson’s moat and its business, including:

  • Technological Obsolescence: Rapid innovation in industrial and electronics industries can quickly make some of their technologies and products obsolete.
  • Competition: Increasing competition from other suppliers and new entrants could squeeze the profitability of the company.
  • Economic Cycles: Demand for its products depends highly on the economic climate. Recessions and industry downturns could result in lower sales and profits.
  • Customer Concentration: Some of their larger customers may be able to demand lower prices.
  • Acquisition Risk: Given that growth through acquisitions is a significant part of its business model, the potential for failed mergers, integrations or overpaying for acquisitions is a genuine risk.
  • Pricing pressure: As customer preferences and other industry dynamics change, there may be pressures to reduce the prices.
  • Supply chain issues: Supply chain bottlenecks could increase costs and delay production and reduce the capacity of the company to serve its clients.
  • Cyber security: If cyber attacks compromise the company’s systems, customer data may be exposed, and this could result in financial repercussions and other penalties.

Business Resilience

  • Nordson has shown resilience during times of economic uncertainty due to its wide customer base and diversification across different industries.
  • The company’s investment into innovation and cost management techniques positions them for growth and profitability.

Understandability: 3 / 5

The business model of Nordson is relatively straightforward and easy to understand at a high-level but understanding how and why all of their different lines of business make profits is a bit complicated and would require extra research. As a result, the business earns a rating of 3 out of 5.

Balance Sheet Health: 4 / 5

Nordson’s balance sheet is generally healthy. The company has shown an appropriate level of debt, ample liquidity, and consistent cash generation which earns it a 4 out of 5 in terms of balance sheet health.

Recent Concerns / Controversies and Problems

There have been no notable controversies surrounding the company in its recent reports. The management during earnings calls has been generally positive about the outlook and is focused on the continuation of growth. However, some recent concerns were:

  • Supply chain : The management mentioned that supply chain disruption has stabilized, with the company experiencing some slowdown in order flow.
  • Inflation: Management stated they are proactively managing pricing strategies and cost-cutting initiatives to protect their profit margins.
  • Acquisitions: Although they acquired more companies, there is a continued emphasis on strong organic growth and cost-cutting initiatives.
  • ROIC: The management is focused on maintaining positive returns on invested capital but this is expected to decline slightly in the coming quarters.
  • Forex: Management said that FX is a negative headwind.
  • Future Growth : Management is anticipating that the next few quarters may be a bit choppy, due to the current macroeconomic environment.

Given that some of the above problems mentioned in this section can affect the company’s operations negatively, the company must focus more heavily on these in coming quarters to remain a financially successful operation. However, the company seems well-prepared to navigate the current uncertainty, given its focus on cost and revenue management.