Why Are Shares of Nordson at All-Time Highs?

Source: Thinkstock

Source: Thinkstock

The Nordson Corporation’s (NASDAQ:NDSN) stock is at all time highs. There are several reasons to believe it can continue to power higher. Nordson engineers, manufactures, and markets products and systems for dispensing and processing adhesives, coatings, polymers, sealants, biomaterials, fluid management, testing and inspection, surface treatment, and curing. Its Adhesive Dispensing Systems segment provides equipment to apply adhesives, lotions, liquids, and fibers to disposable products; automated adhesive dispensing systems for packaged goods industries; adhesive and sealant dispensing systems to bond and seal plastics, metal, and wood products in the paper and paperboard converting industries; laminating and coating systems to manufacture continuous-roll goods in nonwovens, textile, and paper industries; and components and systems used in plastic extrusion and injection molding processes.

The company’s Advanced Technology Systems segment offers automated dispensing systems for attachment, protection, and coating of fluids and related gas plasma treatment systems for cleaning and conditioning surfaces prior to dispense; precision manual and semi-automated dispensers, plastic molded syringes, cartridges tips, and fluid connection components for applying and controlling the flow of adhesives, sealants, lubricants, and biomaterials; and bond testing and automated optical and X-ray inspection systems. This segment serves electronics, medical, and related industries.

Its Industrial Coating Systems segment provides automated and manual dispensing systems to apply component adhesives and sealant materials; liquid paints and coatings to consumer and industrial products; ultraviolet equipment to cure and dry operations for specialty coatings, semiconductor materials, and paints; and powder paints and coatings to various metal, plastic, and wood products. Sales are also at at all time highs and Nordson continues to deliver strong financial results.

For the quarter ending April 30, 2014, sales were $417 million, a 9 percent increase over the prior year’s second-quarter. This increase in sales included a 4 percent increase in organic volume and a 5 percent increase related to the first year effect of acquisitions. Operating profit was $93 million, net income was $62 million, and diluted earnings per share were $0.96. Prior year second-quarter sales, operating profit, net income, and diluted earnings per share were $382 million, $82 million, $55 million, and $0.84, respectively.

Sales volume in Adhesive Dispensing Systems improved 18 percent compared to the second quarter a year ago, inclusive of 8 percent organic growth and 10 percent growth from the first year effect of the Kreyenborg acquisition. The organic growth was driven by rigid packaging, general product assembly, disposable hygiene, and polymer processing end markets, and by growth in every geography with the exception of Japan, which was flat. The Adhesive Dispensing segments operating margin was 27 percent, up 4 percentage points from the first quarter and up 1 percentage point over the prior year’s second-quarter.

In Advanced Technology Systems, second-quarter sales volume decreased 3 percent over the prior year. Similar to conditions reported last quarter, solid organic growth in products for electronics test and inspection and fluid management, along with surface treatment markets, was offset by softness in demand for automated dispensing equipment in selected mobile electronic device end markets. Encouragingly, the company has begun to see an increase in orders for these automated systems in recent weeks and the company expects to generate solid sales growth in the company’s third quarter within this segment. Geographically, organic sales growth in the second quarter over the prior year in the U.S. and Europe was offset by softness in other regions. Operating margin for the Advanced Technology segment was 24 percent in the second quarter, up 13 percentage points from the first-quarter.

Industrial Coating Systems sales volume increased 4 percent compared to the second-quarter a year ago. Nordson generated strong organic growth in most all product lines, driven by demand in consumer durable and industrial end markets, food and beverage end markets, and UV curing systems for industrial and electronics end markets.. The organic growth was broad based, with increases in all regions except the Americas as compared to the same period a year ago. Overall segment operating margin was 16 percent in the second-quarter, an increase of 7 percentage points compared to the first quarter and 1 percentage point over the prior years second quarter.Nordson President and Chief Executive Officer Michael F. Hilton stated:

Our global team delivered excellent results in the quarter, as innovative products and a strong focus on meeting customer needs helped drive solid organic growth in sales in the majority of the company’s product lines and regions, said. Sales, operating profit, and earnings per share were all second quarter records for Nordson. On a sequential basis, we leveraged strong top line growth of 16 percent to generate incremental operating margin of 67 percent. We also executed on the company’s strategy of returning value to the company’s shareholders by investing $53 million for the repurchase of shares and by distributing approximately $12 million in dividends during the quarter. Free cash-flow in the quarter before dividends was $46 million and the company’s balance sheet has significant capacity for ongoing investments.

Looking ahead to the third-quarter of fiscal 2014, sales growth is expected to be in the range of 9 percent to 13 percent as compared to the third-quarter a year ago. This growth is inclusive of organic volume growth of 3 to 7 percent, 5 percent growth from the first year effect of acquisitions, and a positive 1 percent currency translation effect based on the current exchange rate environment. GAAP diluted earnings per share are expected to be in the range of $1.06 to $1.16. Based on the company’s backlog and current 12 week order rates, the midpoint of the company’s sales guidance includes organic growth of 5 percent over the prior year’s third quarter, a strong level given the current macroeconomic environment.Mr Hilton added:

This growth is being driven by the value we provide to the company’s customers and the many opportunities in the diverse end markets we serve. At the midpoint of the company’s guidance we are forecasting operating margin of about 24 percent in the third-quarter, an improvement both on a year-over-year and sequential basis. Our global team can be counted on to continue executing at a high level, and we expect the company’s ongoing focus on customer satisfaction, global support, differentiated technology and continuous improvement should result in strong long-term returns for the company’s shareholders.

Given the incredible performance, Nordson shares are up another 6 percent this week. The stock is near all time highs, but given its growth trajectory, I think the stock can continue to climb higher and will see multiple expansion as investors become more confident in future earnings potential of this global company.

Disclosure: Christopher F. Davis holds no position in Nordson and has no intentions of initiating a position within the next 72 hours. He has a buy rating on the stock and a $90 price target.

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