Wednesday, May 10, 2017

Nordson And The High Cost Of Excellence

In terms of smaller industrial companies, I'm not sure that there are many that deserve the Street's esteem (and the high multiples that tend to go with it) more than Nordson (NASDAQ:NDSN). Management has taken the company's strong technology in precision dispensing and fluid management and used it to establish strong share in its core adhesives market, as well as solid long-term revenue growth, impressive margin improvement, and good returns on capital and free cash flow. I'd also note that management has shown itself adept at M&A but is willing to return capital to shareholders (with a 50-year-plus record of raising the dividend).

The problem with good companies, particularly when their end markets are turning up, is the valuation, and that's the case here. Using a DCF model, Nordson needs to generate very high single-digit to low double-digit revenue growth (with some FCF margin improvement) to generate a high-single-digit total return. That's a high, albeit not impossible, bar to reach, and some investors may be willing to accept a lower return (and lower implied/required growth) given the company's solid prospects and above-average quality.

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Nordson And The High Cost Of Excellence

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