Nordson's Growth Story Sticks

By Stephen D. Simpson, CFA | December 20, 2010 AAA

Like it or not, the U.S. economy really is recovering. Rail traffic continues to highlight that companies are shipping more and more "stuff" around the country. Grainger's (NYSE:GWW) monthly sales rates have stayed strong, and then there is the case of Nordson's (Nasdaq:NDSN) volume and order growth.

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Okay, maybe this last point needs a little more explanation, since Nordson is not exactly a household name. Nordson sells a wide range of products that dispense and apply all sorts of adhesives, coatings, sealants, surface treatments and so on. What is intriguing, though, is that this company sells into many different parts of the economy (consumer non-durables, durables, tools, appliances and tech), and if they are seeing broad order growth, that means a lot of industries are opening their wallets for cap-ex spending.

A Solid End To The Year
For the fiscal fourth quarter, Nordson reported that revenue rose 22% on the back of a 23% jump in product volume. That result puts the company at the lower end of a narrow analyst range. Growth was strongest in the advanced technology business, with 42% overall growth led by nearly 43% volume growth. The adhesive dispensing business (the company's largest) saw revenue rise about 8%, while the industrial coatings business produced sales growth of 38%. (For related reading, see Is Growth Always A Good Thing?)

Operating leverage was also fully in play this quarter. The company's gross margin improved by a full point, while the operating margin improved about six full points (adjusting the year-ago figure for some impairments). All in all, adjusted operating profits grew almost 59%, with every segment showing improvement.

No Slow Down ... Yet
Plenty of industrial companies, including names like Eaton (NYSE:ETN), Dover (NYSE:DOV), Danaher (NYSE:DHR) and Nordson's most direct rival Illinois Tool Works (NYSE:ITW), have echoed familiar themes - the recovery has been strong and, though it may slow a bit or be lumpy going into 2011, growth is still there. Nordson's order flow would seem to corroborate that. Overall orders through early December were up 22%, with each segment showing double-digit growth.

Even allowing that the company's advanced technology business can be volatile, there are plenty of reasons for investors to keep an eye on this company. For starters, it seems to have a good balance of stable-growth customers like Kimberly Clark (NYSE:KMB) and Procter & Gamble (NYSE:PG) in products like packaging and diapers, while also having leverage and exposure to companies like Medtronic (NYSE:MDT) and Apple (Nasdaq:AAPL) by being active in electronics and life sciences.

The Bottom Line
If there is bad news here, it is that the industrial recovery theme has not been new or fresh for many months, and Nordson's stock has already appreciated more than 50% this year. In a familiar twist, a lot of analysts that once fretted about when the recovery would ever appear are now transitioning to the idea that the best of the recovery is gone and Nordson may have difficulty maintaining this pace of growth. That is a normal part of the process, and it is part of their jobs - the real question for any prospective Nordson investor is much more about what will happen than what has happened. (For more, see The Estimated Ultimate Recovery Dance.)

To that end, Nordson is not the compelling buy it once was, and investors buying today should not expect the same pace of growth in earnings or stock price as the company has produced in the past year. Nordson has a lot of good points in its favor, including that solid exposure to consumable non-durables and good returns on capital, but long-term investors might want to wait for the market's love affair to cool a bit before buying a major position. (For more, see Profiting From A Consumerless Recovery.)

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