Nordson meets some but not all of Benjamin Graham's requirements for a defensive stock. The Farm & Heavy Construction Machinery company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.
Nordson Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (6.33) * 6 year average book value per share (45.248) = $87.48
At today's price of $224.37 per share, Nordson is now trading 156.5% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value
Nordson’s average sales revenue over the last 6 years has been $3.39 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.
Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. Nordson had positive retained earnings from 2009 to 2022 with an average of $1.96 Billion over this period.
Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.To determine Nordson's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $3.43, $-2.38, and $2.46 respectively. This gives us an average of $1.17 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $0.31, $7.74, and $8.81, for an average of $5.62. Now we see that Nordson's EPS growth was 380.34% during this period, which satisfies Ben Graham's requirement.
Negative Current Asset to Liabilities Balance and an Average Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Nordson fails on both counts with a current ratio of 1.4 and a debt to net current asset ratio of -0.9.
Conclusion
Nordson offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.
| 2017-12-15 | 2018-12-14 | 2019-12-13 | 2020-12-18 | 2021-12-17 | 2022-12-19 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $2,067 | $2,255 | $2,194 | $2,121 | $2,362 | $2,590 |
| Gross Margins | 55.0% | 55.0% | 54.0% | 53.0% | 56.0% | 55.0% |
| Operating Margins | 22% | 22% | 22% | 21% | 26% | 27% |
| Net Margins | 14.0% | 17.0% | 15.0% | 12.0% | 19.0% | 20.0% |
| Net Income (MM) | $296 | $377 | $337 | $250 | $454 | $513 |
| Net Interest Expense (MM) | -$35 | -$48 | -$45 | -$30 | -$23 | -$20 |
| Depreciation & Amort. (MM) | -$91 | -$108 | -$110 | -$113 | -$104 | -$100 |
| Earnings Per Share | $5.08 | $6.4 | $5.79 | $4.27 | $7.74 | $8.72 |
| EPS Growth | n/a | 25.98% | -9.53% | -26.25% | 81.26% | 12.66% |
| Diluted Shares (MM) | 58 | 59 | 58 | 58 | 59 | 59 |
| Free Cash Flow (MM) | $424 | $594 | $446 | $552 | $584 | $564 |
| Capital Expenditures (MM) | -$68 | -$89 | -$63 | -$50 | -$38 | -$51 |
| Net Current Assets (MM) | -$1,371 | -$1,086 | -$924 | -$895 | -$467 | -$393 |
| Long Term Debt (MM) | $1,256 | $1,294 | $1,075 | $1,068 | $782 | $345 |
| Net Debt / EBITDA | 2.73 | 2.02 | 1.84 | 1.63 | 0.72 | 0.72 |
