With Nordson Corp (NDSN) reporting "the strongest quarterly results in company history," we decided to take a look at this almost 60-year-old company through the lens of F.A.S.T. Graphs™.
About Nordson Corp: Directly from their website
"Nordson Corporation delivers precision technology solutions that help customers increase throughput, productivity and up-time, enable new products and features, and decrease material usage. The company engineers, manufactures and markets differentiated products and systems used for dispensing adhesives, coatings, sealants, biomaterials and other materials, fluid management, test and inspection, UV curing and plasma surface treatment, all supported by application expertise and direct global sales and service. Nordson serves a wide variety of consumer non-durable, durable and technology end markets including packaging, nonwovens, electronics, medical, appliances, energy, transportation, construction, and general product assembly and finishing. Founded in 1954 and headquartered in Westlake, Ohio, the company has operations and support offices in more than 30 countries."
Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Earnings & Price Correlated Fundamentals-at-a-Glance
A quick glance at the historical earnings and price correlated FAST Graphs™ on Nordson Corp shows a picture of undervaluation based upon the historical earnings growth rate of 19.8% and a current PE of 16.2. However, analysts are forecasting the earnings growth to continue at about 12.5%, and when you look at the forecasting graph below, the stock appears in-value, (it's inside of the value corridor of the five orange lines - based on future growth).
Nordson Corp: Historical Earnings, Price, Dividends and Normal PE Since 2002
Performance Table Nordson Corp
The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return; capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 14.4% capital appreciation (green circle), long-term shareholders of Nordson Corp, assuming an initial investment of $1,000, would have received an additional $263.82 in dividends (blue highlighting) that increased their total return from 14.4% to 15% per annum versus 4.8% in the S&P 500 (red circle).
The following graph plots the historical PE ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 2002.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Nordson Corp is 2.71 which is historically high.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
- The rate of change (growth rate) of the company's earnings
- The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 9 leading analysts reporting to Capital IQ forecast Nordson Corp's long-term earnings growth at 12.5% (orange circle). Nordson Corp has medium long-term debt at 36% of capital (red circle). Nordson Corp is currently trading at a P/E of 16.2 (blue circle), which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Nordson Corp's True Worth™ valuation would be $92.74 at the end of 2017 (brown circle on EYE Chart), which would be a 11.7% annual rate of return from the current price (yellow highlighting).
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Nordson Corp to an equal investment in 10 year Treasury bonds, illustrates that Nordson Corp's expected earnings would be 6.2 (purple circle) times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Disclosure: No position at the time of writing.
