Nordson Buy Report Final Blake Ruschman ASAP 2017 PDF

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The analysis provided above is based on financial information, and speculation of future growth in statements associated with NDSN stock. All outside sources are perceived to be credible, and the authors do not take fault for any changes in numerical or informational accuracy that may result. This report is for informational purposes only, and is the opinion of the writers. This report has no regard for the specific

EQUITY RESEARCH – Nordson BluePoint Capital Management September XX, 2016

Blake Ruschman – Analyst [email protected]

562.833.7829

Nordson Corp. (NDSN) 12/5/16

BUY Key Stock Statistics Current Price: $104.84 Target Price: $116.72 Discount: 10.18%

Market Capitalization (B): $6,161 Dividend/Yield (%): 1.08/1.02% Beta: 1.12

52-Wk Range: $51.89-$108.69 Forward P/E: 21.85 Trailing P/E: 23.0

Investment Thesis Revenue/Earnings Data


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Industries with exposure to the Asia Pacific region offer potential for growth in the medical field and technology due to increasing income and further development of markets.

Brief Company Overview

Nordson is a premier industrial technology company focused on precision dispensing, fluid control and related processes. Their business is comprised of three segments: adhesive dispensing, advanced technology, and industrial coating. These products are supported with extensive application expertise and direct global sales and service teams. They serve a wide variety of consumer non-‐durable, consumer durable and technology end markets. Nordson supplies manufacturers with products and systems that will improve efficiency and increase automation. Approximately 69% of revenue comes from outside the USA with direct presence in almost 40 countries.

FY16 Outlook* Revenue: + 5.51%

EPS: + 33.71% to $4.68 E 4Q16 Outlook*

§ Sales up 6% to 10% compared to 4Q15, inclusive of:

§ Organic volume up 5% to up 9% § 1% growth from first year effect of

acquisitions § Minimal impact related to unfavorable

currency translation based on current exchange rates

§ Gross margin ~ 54% at midpoint of guidance

§ Operating margin ~ 22% at midpoint of guidance,

§ Diluted EPS in the range of $1.15 -‐ $1.27

Source: Investor Presentation August 22, 2016

Catalyst

Nordson has developed efficient automation systems and products with their advanced technology systems (ATS) for electronic and disposable medical products. Exposure to emerging markets in the Asia Pacific region offers growth potential for their mobile electronics and medical segments. ATS consists of Electronic Systems, Fluid Management, and Test & Inspection.

Sector Industrials Industry Diversified Industrials

1 Yr. Chart as of 12/5/16

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investment needs or objectives of readers. Investors are encouraged to conduct their own research and come to their own conclusions before making the in a company.

EQUITY RESEARCH – Nordson BluePoint Capital Management

Catalyst

Consumer Electronics & Medical Product Growth in China: Opportunity for ATS

Ø Consumer electronics consumption has continued to grow in China, despite macroeconomic slowdown. Growing upper middle class consumption in China is expected to continue to increase by about 17% per year through 2020; with increasing household income is driving demand. The Chinese disposable medical products industry is expected to grow by about 15% annually through 2018, due to rapidly growing sanitation needs. Nordson is continuing to penetrate the market by meeting the strong demand for automated and semi-‐automated dispensing equipment, test and inspection equipment, and surface treatment systems in medical and electronic end markets in the Asia Pacific region. The cost of assembly fluids is increasing, so companies are turning to precision systems like Nordson’s market leading ATS to keep their costs down. Nordson delivers its customers systems that can increase line speeds by up to 50% and can double uptimes, while reducing consumption of materials. ATS markets include:

Ø Mobile phones Ø Tablets Ø Personal computers Ø Wearable technology Ø Liquid crystal displays Ø Micro hard drives Ø Microprocessors Ø Printed circuit boards Ø Micro-‐electronic mechanical systems (MEMS) Ø Semiconductor packaging Ø Precision manual/semi-‐automated dispensers Ø Single-‐use plastic medical products

Ø Nordson’s equipment and systems are the most efficient in the market when it comes to manufacturing. Medical product opportunities for Nordson also stem from China’s emerging markets moving towards medical OEMs outsourcing fluid management systems. Nordson has manufacturing facilities in the Asia pacific region, as well as a new state of the art facility in Colorado for manufacturing, R&D, and engineering needs to meet demand for consumer non-‐durable, consumer durable, and technology end markets globally.


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Growth in the Asia Pacific region is expected to grow about 6.5% in 2017, and 9% in Japan. These growth rates are conservative and mirror growth from 2015-‐2016

Ø Nordson works with all the leading global manufacturers in the phone/tablet space. Additionally, as domestic Chinese manufacturers emerge, Nordson will conduct business with them as well.

Ø The medical business is largest in supporting North America and European OEMs for single use medical products. An increasing amount of Chinese OEMs and their need to outsource will help drive Nordson Medical in an emerging market.

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Diversified Revenue Sources

Competitive Advantage & Sustainability of Company

Types of Products

Geographic Sales Breakdown Segments of Operation

End Market Diversification



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Favorable Macro Economic Trends for Nordson Long-Term

• Disposable hygiene products –

penetration remains low in emerging markets

• Packaged convenience items – penetration remains low in emerging markets

• Proliferation of mobile electronic devices and smart products, embedded sensors, internet of things

• Proliferation of lightweight, durable plastics

• Replacement of mechanical fasteners with adhesives – “light-weighting”

• Outsourcing of fluid management systems by medical OEMs

• Disposable medical products for sanitary reasons

• Environmental advantages of powder coatings

• New OEMs in emerging regions

• Recapitalization opportunity related to large installed product base

Source: Investor Presentation August 22, 2016

Norson’s ATS segment comprises 35% of revenue; so continued growth will have a significant impact on the bottom line. It is growing at a faster pace than the other segments due to the quality, efficiency and exposure to emerging markets. As disposable medical products become more vital for sanitation, and electronic devices and technology manufacturing growth continues, penetration into emerging markets becomes possible through product tiering (see Appendix). Nordson has positioned itself to seize multiple opportunities in these markets through plant expansion and continuous improvements for their processes to drive intrinsic value dramatically in the future.

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Discounted Free Cash Flow Model

Using a DCF model for an estimated time period of ten years out to 2025, Nordson Corp’s stock is undervalued by 10.18% with a target price of $116.72 per share. Revenue is assumed to be growing at a relatively steady pace around 5% for three years until increasing roughly 4% to about 9% in year 5. This is due to the expected effect of emerging markets growing and adopting more Nordson products through the tiering strategy. The terminal growth rate is 2.5%. The following assumptions were used:



562.833.7829

Valuation

Beta 1.12 Risk Free Rate 2.5%

Market Risk Premium 6.5% Current Share Price $104.84 Shares Outstanding 57.20 M

Tax rate 35.00% After-tax Cost of Debt 1.02% Total Debt 1,044.9 Target Price $116.72 Discount to Current Price 10.18%

WACC 8.76%

Porter’s Five Forces

FY16 FY17 FY18 FY19 FY20

Forecast Forecast Forecast Forecast Forecast

Revenue 1,781 1,854 1,941 2,095 2,282 Y-O-Y Growth 5.51% 5.00% 5.00% 7.92% 8.92%

Growth Rate Forecast:

Threat of Substitute: Moderate

There are many different products and systems in the industrial equipment market and substitutes are common, but quality is often the deciding factor. Nordson relies heavily on innovation to drive success, so if another company develops a more efficient system or product it may adversely affect any of the three business segments. Enhancing existing products, as well as developing and manufacturing new products with improved capabilities will cause Nordson to continue to be a leading provider of precision technology solutions for the industrial equipment market. Further improvements in productivity to maintain a competitive position are vitally important. Difficulties or delays in research, development or production of new products or failure to gain market acceptance of new products and technologies may reduce future sales and adversely affect the ability to compete with substitutes. Nordson’s systems are award winning and considered top tier in their industry.

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Threat of New Entrants: Low

Threat of new entrants is low due to an initial large capital requirement. New entrants face the difficulties and costs of setting up manufacturing facilities, R&D, and competing against dominant existing firms with solid infrastructure. Nordson also operates globally, which requires a significant amount of knowledge in regards to currencies, international relations, manufacturing and shipping logistics.

Threat of Competition: Moderate

Nordson faces competition across all three segments of its business. Their equipment competes with a broad variety of alternative bonding, sealing, finishing, coating, processing, testing, inspecting, and fluid control techniques. The main factors that influence Nordson’s competitive position is pricing, product quality and service. Currently, Nordson is the market leader in their three business segments due to high-‐quality, innovative products and technologies, as well as service and technical support. A competitive advantage utilized by Nordson is a worldwide network of direct sales and technical resources that other competition does not or cannot compete with based off of scale. Main competitors: Graco Inc., 3M, Applied Industrial Technologies.

Buyer Power: Low

Nordson serves a broad customer base, both in terms of industries and geographic regions. In 2016, no single customer accounted for ten percent or more of sales. No part of Nordson’s business depends upon or includes a significant amount of government contracts.

Supplier Power: Low

The power of suppliers is low based upon all significant raw materials used being available through multiple sources. Many components are made in standard modules that can be used in more than one product or in combination with other components for a variety of models. Nordson selects suppliers on a competitively selected cost basis, quality and service. An adverse event to disrupt relationships between customers, subcontractors and materials suppliers that are exposed to operations could affect supply. Additionally, Natural gas and other fuels are our primary energy sources. Standby capacity for alternative sources are available should they be required.

Company Overview

Nordson Corporation delivers precision technology solutions to help customers succeed worldwide. They engineer, manufacture and market differentiated products used for dispensing adhesives, coatings, sealants, biomaterials and other materials; for fluid management; for test and inspection; and for UV curing and plasma surface treatment. Nordson supports their products with application expertise and direct global sales and service. Nordson Company serves numerous consumer non-‐durable, durable and technology end markets including packaging, nonwovens, electronics, medical, appliances, energy, transportation, construction, and general product assembly and finishing. Nordson has a track record of increasing annual dividends consistently for 53 years. The company was founded in 1954 and is headquartered in Westlake, Ohio, USA; Nordson has operations and support offices in more than 30 countries. Nordson Company Website



562.833.7829

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The analysis provided above is based on financial information, and speculation of future growth in statements associated with NDSN stock. All outside sources are perceived to be credible, and the authors do not take fault for any changes in numerical or informational accuracy that may result. This report is for informational purposes only, and is the opinion of the writers. This report has no regard for the specific investment needs or objectives of readers. Investors are encouraged to conduct their own research and come to their own conclusions before making the decision to invest in a company

Risks

§ Nordson is exposed to fluctuations in foreign currency exchange rates, particularly with respect to the euro, the yen, the pound sterling and the Chinese Yuan. Any significant change in the value of the currencies of the countries in which Nordson conducts business against the United States dollar could affect their ability to sell products competitively and control cost structure, which could have a material adverse effect on business, financial condition, and results of operations. Negative currency translation had an adverse impact on Nordson’s business is 2015.

§ The potential for products to infringe upon the intellectual property of others would cause costly litigation and, if Nordson is not successful, may cause substantial damages required to be paid and prohibit the sale of certain products.

§ Political conditions in foreign countries in which Nordson operates could have an adversely affect on business. Nordson conducts manufacturing, sales and distribution operations globally and is subject to risks associated with doing business outside the United States.

Risks



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Appendix

Balance Sheet

Balance Sheet as of: Restated

Oct-31-2013 Oct-31-2014 Oct-31-2015 Jul-31-2016 Currency USD USD USD USD ASSETS Cash And Equivalents 42.4 42.3 50.3 60.3 Short Term Investments - - - - Total Cash & ST Investments 42.4 42.3 50.3 60.3 Accounts Receivable 288.2 342.8 368.2 412.6 Other Receivables 11.0 16.7 14.0 - Notes Receivable 9.5 6.3 7.3 - Total Receivables 308.7 365.8 389.6 412.6 Inventory 198.4 210.9 225.7 239.6 Prepaid Exp. 21.7 23.7 21.2 31.7 Deferred Tax Assets, Curr. 30.9 29.9 24.9 25.5 Other Current Assets - - - - Total Current Assets 602.1 672.7 711.6 769.7 Gross Property, Plant & Equipment 527.9 574.8 620.3 - Accumulated Depreciation (326.9) (350.4) (370.3) - Net Property, Plant & Equipment 201.0 224.4 249.9 267.6 Goodwill 939.2 1,052.5 1,082.4 1,084.8 Other Intangibles 269.1 291.3 277.4 254.8 Deferred Tax Assets, LT 9.4 6.6 5.7 3.5 Other Long-Term Assets 32.5 32.6 33.4 29.1 Total Assets 2,053.2 2,280.1 2,360.4 2,409.5 LIABILITIES Accounts Payable 62.1 68.5 68.2 71.4 Accrued Exp. 101.1 137.0 140.9 113.3 Short-term Borrowings 3.6 106.2 1.1 6.9 Curr. Port. of LT Debt 10.8 10.8 22.8 10.7 Curr. Port. of Cap. Leases 5.5 5.1 4.9 0.7 Curr. Income Taxes Payable 14.5 16.6 28.6 30.6 Unearned Revenue, Current 28.3 25.6 22.9 29.4 Def. Tax Liability, Curr. 1.3 1.2 1.3 4.8 Other Current Liabilities 9.4 - - 10.7 Total Current Liabilities 236.8 370.9 290.8 278.4 Long-Term Debt 638.2 682.9 1,092.6 1,026.6 Capital Leases 10.1 11.0 9.7 - Pension & Other Post-Retire. Benefits 163.5 192.4 184.8 166.9 Def. Tax Liability, Non-Curr. 89.5 87.1 89.8 89.3 Other Non-Current Liabilities 27.2 31.1 32.8 36.6 Total Liabilities 1,165.3 1,375.3 1,700.4 1,597.7 Common Stock 12.3 12.3 12.3 12.3 Additional Paid In Capital 304.5 328.6 349.0 369.4 Retained Earnings 1,362.6 1,561.0 1,717.2 1,872.2 Treasury Stock (734.1) (893.8) (1,273.8) (1,303.1) Comprehensive Inc. and Other (57.4) (103.2) (144.7) (138.9) Total Common Equity 887.9 904.8 660.0 811.8 Total Equity 887.9 904.8 660.0 811.8 Total Liabilities And Equity 2,053.2 2,280.1 2,360.4 2,409.5

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Income Statement

For the Fiscal Period Ending 12 months

Oct-31-2013 12 months


Oct-31-2015

LTM 12 months

Jul-31-2016 Currency USD USD USD USD Revenue 1,542.9 1,704.0 1,688.7 1,745.9 Other Revenue - - - - Total Revenue 1,542.9 1,704.0 1,688.7 1,745.9 Cost Of Goods Sold 676.8 758.9 774.7 792.5 Gross Profit 866.1 945.1 914.0 953.4 Selling General & Admin Exp. 541.2 575.4 584.8 586.7 R & D Exp. - - - - Depreciation & Amort. - - - - Other Operating Expense/(Income) - - - - Other Operating Exp., Total 541.2 575.4 584.8 586.7 Operating Income 325.0 369.7 329.1 366.7 Interest Expense (14.8) (15.0) (18.1) (20.7) Interest and Invest. Income 0.4 0.6 0.6 0.7 Net Interest Exp. (14.4) (14.5) (17.5) (20.0) Currency Exchange Gains (Loss) (2.2) (0.5) 0 2.1 Other Non-Operating Inc. (Exp.) 1.8 (0.7) (0.3) (1.8) EBT Excl. Unusual Items 310.1 354.1 311.3 347.0 Restructuring Charges (1.1) (2.6) (11.4) (13.5) Impairment of Goodwill - - - - Gain (Loss) On Sale Of Assets 2.1 - (0.7) (0.7) Insurance Settlements - 1.0 - - Legal Settlements - - 1.6 2.4 Other Unusual Items - - - - EBT Incl. Unusual Items 311.1 352.5 300.9 335.3 Income Tax Expense 89.3 105.7 89.8 89.7 Earnings from Cont. Ops. 221.8 246.8 211.1 245.6 Earnings of Discontinued Ops. - - - - Extraord. Item & Account. Change - - - - Net Income to Company 221.8 246.8 211.1 245.6 Minority Int. in Earnings - - - - Net Income 221.8 246.8 211.1 245.6

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Cash Flow

For the Fiscal Period Ending 12 months



Oct-31-2015

LTM 12 months

Jul-31-2016 Currency USD USD USD USD Net Income 221.8 246.8 211.1 245.6 Depreciation & Amort. 31.8 34.4 37.7 39.7 Amort. of Goodwill and Intangibles 22.7 25.3 27.5 29.2 Depreciation & Amort., Total 54.4 59.8 65.2 68.9 (Gain) Loss From Sale Of Assets (1.9) 0.2 0.4 0.7 Asset Writedown & Restructuring Costs - - - - Stock-Based Compensation 11.8 17.4 15.3 17.7 Tax Benefit from Stock Options (5.5) (6.4) (3.7) (3.9) Provision & Write-off of Bad debts 0.9 0.9 1.0 1.0 Other Operating Activities 5.9 3.9 2.2 (1.9) Change in Acc. Receivable 20.0 (65.7) (37.2) (37.2) Change In Inventories (10.7) (8.7) (14.2) (14.2) Change in Acc. Payable (2.5) 6.9 (1.3) (1.3) Change in Unearned Rev. (0.8) (2.1) (1.1) (1.1) Change in Inc. Taxes (8.6) 9.5 15.6 15.6 Change in Other Net Operating Assets (16.3) 25.7 8.6 (0.7) Cash from Ops. 268.4 288.2 262.0 289.4 Capital Expenditure (47.2) (43.6) (62.1) (58.6) Sale of Property, Plant, and Equipment 3.8 0.3 0.6 1.2 Cash Acquisitions (176.3) (186.4) (75.6) (60.6) Divestitures - - - - Invest. in Marketable & Equity Securt. (0.8) (0.9) (1.5) 0 Net (Inc.) Dec. in Loans Originated/Sold - - - - Other Investing Activities - - - - Cash from Investing (220.5) (230.5) (138.5) (118.1) Short Term Debt Issued 5.0 108.7 59.9 - Long-Term Debt Issued 270.3 158.8 719.5 - Total Debt Issued 275.3 267.5 779.4 253.2 Short Term Debt Repaid (51.5) (6.1) (164.7) - Long-Term Debt Repaid (213.9) (113.4) (294.4) - Total Debt Repaid (265.4) (119.5) (459.2) (152.5) Issuance of Common Stock 6.0 7.0 5.4 8.6 Repurchase of Common Stock (33.4) (166.4) (383.9) (229.5) Common Dividends Paid (40.5) (48.4) (54.8) (55.4) Total Dividends Paid (40.5) (48.4) (54.8) (55.4) Special Dividend Paid - - - - Other Financing Activities 5.5 6.4 2.1 2.4 Cash from Financing (52.4) (53.5) (111.0) (173.3) Foreign Exchange Rate Adj. 5.7 (4.2) (4.5) 1.3 Net Change in Cash 1.1 (0.1) 8.0 (0.7)

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Product Tiering Strategy

Nordson supplies the best automation products through their ATS segment including:

Ø Automated dispensing systems for fluids Ø Automated gas plasma systems for semiconductor, medical, and circuit boards (Award winning FlexTRAK-‐CDS) Ø Bond testing & x-‐ray inspection systems for electronic assembly industries Ø Automated optical inspection systems for electronic assembly Ø Automated and manual dispensers for assembly fluids Ø Single use medical equipment

Nordson ASYMTEK, their fluid dispensing systems, reduces coating process time by 50%, and essentially doubles output. Nordson DAGE attributes yield enhancement by applying x-‐ray inspection to electronic assembly industries. The acquisition of MatriX this year adds the ability to scale in mobile markets and has helped branch further into the European automotive electronics. Nordson MEDICAL will continue to be driven by high demand for disposable medical end-‐user products, supported by the recent completion of a new state of the art facility in Colorado that will supply global production.

Nordson’s products gain positive traction using their product tiering strategy to penetrate emerging markets. Nordson offers the most productive, highest quality automation systems at the initial and scaled stages of manufacturing for the industries in which they do business. Penetration into the developing and growing markets in China’s consumer electronic and medical products will drive growth as the markets expand. Nordson creates value for customers by developing solutions that increase uptime, enable faster line speeds and reduce consumption of materials. The tiered approach offers numerous benefits to the players that are in the earlier stages of the automation curve and provides huge upscale potential for Nordson.

Benefits of ATS and Product Tiering to Asia Pacific Players and Nordson Emerging Asia Pacific Players Nordson

-‐Offer cheaper automation to smaller firms -‐Retain and grow along side customers -‐Provide products to increase productivity as scale increase

-‐Integrate new technologies seamlessly into production at the highest level of technology

-‐Access to the most productive and highest quality products/processes to drive growth and compete

-‐Provide new technologies to an existing customer base already using Nordson products

-‐Allow firms to penetrate into markets

The tiering strategy offers quality products at a price that smaller firms can initially afford, allowing them to gradually build up to the most efficient, higher priced products for automation as they grow their business. Nordson has had success penetrating multiple Chinese original equipment manufacturers (OEM) and will continue to do so going forward, specifically focused on mobile devices and medical products. Chinese mobile players will contribute heavily because they’re earlier on in the automation curve. An example of new technologies to fuel product tiers is the acquisition of MatriX in 2016 contributed an automated in-‐line X-‐ray inspection technology that will add scale in mobile device markets. Incorporating the X-‐ray technology into an automation platform has created traction in China, and looking forward, will create further opportunities.

Documents

Nordson Buy Report Final Blake Ruschman ASAP 2017 PDF