3 Reasons NDSN is Risky and 1 Stock to Buy Instead

Nordson has had an impressive run over the past six months as its shares have beaten the S&P 500 by 25.1%. The stock now trades at $292.36, marking a 31.7% gain. This run-up might have investors contemplating their next move.

Is there a buying opportunity in Nordson, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Nordson Not Exciting?

We’re happy investors have made money, but we don't have much confidence in Nordson. Here are three reasons we avoid NDSN and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Professional Tools and Equipment companies by analyzing their organic revenue. This metric gives visibility into Nordson’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Nordson’s organic revenue averaged 1.5% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Nordson might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Nordson’s revenue to rise by 4.6%, close to its 5.7% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Nordson’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Nordson isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 25.7× forward P/E (or $292.36 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

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