Nordson (NDSN) Up 9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Nordson (NDSN). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Nordson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Nordson's Q3 Earnings and Revenues Miss Estimates

Nordson’s third-quarter fiscal 2019 (ended Jul 31, 2019) earnings lagged expectations, the negative earnings surprise being 10%. This was the fourth consecutive quarter of weaker-than-expected results.

Adjusted earnings, excluding one-time charges and gains, were $1.62 per share, missing the Zacks Consensus Estimate of $1.80. However, the bottom line increased 1.3% from the year-ago figure of $1.60 primarily due to decline in cost of sales, fall in interest expenses and lower share count.

Forex Woes Affect Revenues

In the reported quarter, Nordson’s net sales were $559.7 million, decreasing 3.7% year over year. The top line was hurt by 2% decrease in organic volume and 2% adverse impact of unfavorable movements in foreign currencies. Further, the top line missed the Zacks Consensus Estimate of $588.1 million.

At the reported quarter end, backlog was $431 million, up 3% year over year.

On a regional basis, revenues from the United States fell 0.5% year over year to $190.5 million. Revenues generated from operations in Japan increased 5.9% to $30.5 million while that from the Asia Pacific decreased 11.7% to $148.3 million. Revenues from Europe decreased 1% to $143.4 million and that from the Americas increased 21.5% to $47 million.

The company reports top-line results under three segments — Adhesive Dispensing Systems, Advanced Technology Systems and Industrial Coating Systems. A brief discussion on the segmental performance for the quarter is provided below:

Adhesive Dispensing Systems segment’s revenues totaled roughly $249 million, increasing 1.7% year over year. The improvement was driven by 3.7% increase in volume, partially offset by 2% adverse impact of foreign currency translation.

Advanced Technology Systems’ revenues were $253.1 million, down 5.1% year over year. The fall was due to 1.2% adverse impact of foreign currency movements, and 3.9% decrease in volume.

Revenues generated from Industrial Coating Systems decreased 17.5% year over year to $57.7 million. Volume declined 16.7% while foreign currency movements had a negative impact of 0.8%.

Margin Details

In the quarter, Nordson’s cost of sales decreased 1.4% to $257.1 million. It represented 45.9% of net sales compared with 44.9% in the year-ago quarter. Selling and administrative expenses declined 5.8% to $172.3 million. It represented 30.8% of net sales compared with 31.5% a year ago.

Adjusted earnings before interest, tax, depreciation and amortization were $158.5 million, decreasing roughly 3% year over year.

Operating profit declined 5.2% to $130.3 million while the margin came in at 23.3% compared with 23.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the fiscal third quarter, Nordson’s cash and marketable securities were $147.8 million, up roughly 54.4% from $95.7 million as of Oct 31, 2018. The company’s long-term debt decreased 8.2% to $1,179.9 million.

In the fiscal third quarter, the company generated net cash of $74.5 million from operating activities, reflecting a year-over-year decrease of 43%. Capital spent on the addition of property, plant and equipment increased 50.4% to $19.4 million. Adjusted free cash flow was roughly $55.3 million, decreasing 53.1%.

During the reported quarter, the company paid dividends amounting to $20.1 million.

Outlook

For fiscal 2019 (ending October 2019), the company anticipates flat to modest organic sales growth.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Nordson has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Nordson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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