As the global economic slowdown and geopolitical risks pose challenges to businesses, Nordson Corporation (NASDAQ:NDSN) is feeling the impact. The company is currently navigating trade and supply chain challenges, especially with China, which has been a major player in the electronics space. Despite having the ability to relocate or expand its operations outside of China, Nordson still faces risks in the electronics industry. With one quarter left in the fiscal year, the company expects minimal topline growth and a narrowing bottom-line. In light of these challenges, using a Sum of the Parts (SOTP) model, I recommend a SELL with a price target of $205.60/share.
The global economic slump is starting to affect Nordson, making the market more challenging. While the company experienced a decline in APAC organic sales, the Americas and Europe saw modest increases. Although Nordson doesn’t disclose specific sales figures for China, it is clear that a significant portion of their revenue comes from the region.
It’s difficult to determine the exact impact of trade with China on Nordson’s future earnings. However, there is a growing trend of the US and China decoupling their supply chains, which could have long-term implications. Recent data shows a decrease in China’s product exports to the US in certain sectors such as computers, other plastic products, and centrifuges. Nordson’s presence in China’s electronics and medical device markets may face challenges as the Chinese government encourages domestic manufacturing. This could lead to a decline in Nordson’s Chinese presence and impact their clients within China.
Nordson’s acquisition of CyberOptics, a company heavily involved in the Chinese market, adds further complexity. The exact impact of this acquisition on Nordson’s operations in China is uncertain. However, assuming CyberOptics’ sales in China remain stagnant, revenue from the Chinese market accounts for less than 1% of Nordson’s total sales in the OSAT business. Similarly, the Chinese regulatory authority’s policies favor domestic manufacturers in the medical device industry, potentially impacting Nordson’s market share in China.
Despite these challenges, Nordson expects a recovery in both the medical fluid components and electronics sectors in the coming year. The company remains confident in achieving its $3,000mm revenue target by 2025, with a 30%+ EBITDA margin. Nordson’s polymers business also shows promise, as the focus on recycled polymers increases in the EU.
Margin compression has been a trend for Nordson, but it remains elevated compared to previous years. The company is planning to issue $850mm of debt to acquire ARAG Group, which will increase their leverage ratio. However, this increase in debt is still relatively low, and the interest expense impact is manageable.
Valuation
Given Nordson’s diverse business segments, a Sum of the Parts (SOTP) analysis is appropriate. Using this analysis, I arrived at a price target of $205.60/share, representing an -8% downside to the current trading price. Nordson currently trades at 17x FY23 EV/EBITDA, making it a SELL recommendation considering the macro challenges, geopolitical risks, and flat growth expectations for the remainder of the year. Despite these challenges, Nordson remains a well-run organization, and investors may seek buying opportunities at a more appealing price in the future.
It’s worth noting that insiders at Nordson have been selling a significant portion of their holdings in recent months. While this may be a result of stock compensation, insider selling can also be seen as a signal.
