This is my first installment of "Companies You Have Never Heard Of." Each week, I will talk about one company that is more than slightly off the beaten path. Today, we will talk about Nordson (NDSN), a manufacturer of dispensing and process technology equipment, based in Westlake, Ohio. The company reports earnings today after the market close.
Nordson is a growth industrial company. It makes systems and aftermarket parts that increase the efficiency by which adhesive materials are dispensed in a variety of applications, such as diapers, semiconductors and vehicles. It makes advanced systems for technology companies, like Apple (AAPL), to efficiently assemble devices, and it makes systems that apply coatings, such as paints and sealants.
In addition to having some of the largest manufacturers in the world as customers, the installed base of Nordson systems requires regular maintenance and spare parts. The company provides these services, as well, which has helped NDSN to have among the highest gross margins in industrial land.
The company's balance sheet is stellar, and it has a long history of making smart acquisitions that broaden end-market, and geographic, reach. Especially interesting to me is the growth opportunity in high-value plastics for medical devices, a market that Nordson tapped with its the acquisition of Value Plastics a few years ago.
This is a good business, with gross margins in the 55% to 60% range, consistently, over the years. The quality of this business also enables shares in Nordson to be valued at a premium, both absolutely and vs. other industrials. I think a price-to-earnings multiple in the 18x to 22x is justified when creating a risk/reward mosaic.
Forecasting earnings is critical in determining whether NDSN is attractive for entry, at any given point in time. This is because big projects skew quarterly earnings and order rates. Plus, given capital-spending trends in each of its businesses, Nordson rarely has meaningful visibility beyond six or eight weeks. As a result, some investors ignore this quality company on quarterly earnings volatility. I believe this is nonsense, generally, if you look at the long-term progress this company has made. Over the last 12 months, the stock is down only 9%, compared to other industrials that have been slaughtered. I am not surprised by the resiliency here.
When we hear from Nordson tonight, as they report second-quarter 2016 results, expectations place earnings at $0.90 a share. This is at the lower end of NDSN's guidance of $0.87 to $0.97. We will also get the most up-to-date view of order rates, and earnings guidance for the third fiscal quarter. Consensus is forecasting a seasonally strong sequential increase in earnings of 37% -- to $1.23 per share.
My prognosis is that this may be a tad high, given the current capital-spending environment -- but not by much. Comparisons in the company's Advanced Technology Systems (ATS) segment may be easing, however. We may have gotten a signal from Applied Materials (AMAT), when that company forecasted strong orders for next generation equipment last week.
Keep Nordson on your radar as "a quality company you have never heard of," and watch for potential entries in the $60 range.