Is Nuance Communications a Bargain Here?

With shares of Nuance Communications (NASDAQ:NUAN) trading at around $20.00, is NUAN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

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Nuance Communications didn’t have a memorable day last Friday – unless you were shorting the stock. The stock got hammered by more than 18 percent. As is usually the case with big downward moves during earnings season, weak guidance was the primary reason for the fall. FY2013 EPS was lowered to a range of $1.76 to $1.87, from $1.84 to $1.94, and FY2013 revenue expectations were lowered by $25 million. Is this bad news? Yes. Is it reason to panic? No.

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For Q1, Nuance Communications reported a net loss of $22.1 million, or $0.07 per share. Q1 revenue was $462.3 million. EPS was obviously a disappointment, but revenue increased 27 percent year-over-year. In addition to that, operating cash flow increased 37 percent, healthcare revenue increased 49.6 percent, mobile and consumer revenue increased 21.4 percent, enterprise revenue increased 10.4 percent, and imaging revenue increased 13.7 percent. This hardly looks like a company that’s in trouble when it comes to the long term.

The company’s speech recognition software is used in Apple (NASDAQ:AAPL) iPhones, which is a big plus. Apple’s growth does seem to be slowing, but it’s important not to put too much weight on that aspect of the business since Nuance Communications is highly diversified. By the way, the same speech recognition software is used in Samsung (SSNLF.PK) smartphones, tablets, and smart TVs.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Nuance Communications is strong. The balance sheet is in negative territory, but cash flow is good.

Debt-To-Equity

Cash

Long-Term Debt

NUAN

0.03

$961.10 Million

$2.33 Billion

SAP

0.37

$3.40 Billion

$6.79 Billion

CA

0.27

$2.56 Billion

$1.44 Billion

 

T = Technicals on the Stock Chart Are Weak

Nuance Communications has performed well over a three-year time frame, but 2012 was a rough year. Last Friday didn’t help matters much, either. Over the past year, Nuance Communications has underperformed SAP AG (NYSE:SAP) and CA Technologies (NASDAQ:CA). Nuance Communications is also the only company of the three that doesn’t offer any dividend yield. At the current time, SAP yields 0.90 percent, and CA Technologies yields 4 percent.

1 Month

Year-To-Date

1 Year

3 Year

NUAN

-13.72%

-10.39%

-24.51%

37.84%

SAP

-3.01%

-0.57%

30.14%

94.21%

CA

8.26%

13.83%

-3.39%

22.46%

 

At $20.00, Nuance Communications is currently trading below all its averages.  

50-Day SMA

22.86

100-Day SMA

22.95

200-Day SMA

22.69

 

E = Earnings Have Been Steady           

Earnings and revenue have improved consistently on an annual basis over the past five years. This is a good sign.     

2008

2009

2010

2011

2012

Revenue ($)in billions

868.46M

950.35M

1.12

1.32

1.65

Diluted EPS ($)

-0.18

-0.08

-0.07

0.12

0.65

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in millions

360.64

390.34

431.74

468.74

462.30

Diluted EPS ($)

0.03

0.00

0.25

0.37

-0.07

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There is strong demand for customized voice and natural language solutions, and Nuance Communications is well-positioned to take advantage of that demand. On a geographical basis, Asia has been strong, the United States has been marginal, and Europe has been weak. No surprises there.

Conclusion

As long as there is tablet and smartphone growth, the potential for Nuance Communications will be high. Margins are solid, but they’re not overly impressive for the industry. Cash flow is strong, and there is a nice pipeline in place. Recent results and near-future estimates are subpar due to sacrifices that are likely to pay off in the future. That said, it’s not advisable to seek out investments in stocks that recently dropped more than 18 percent. This indicates a lack of investor confidence, and stocks move on perception more than facts. Therefore, Nuance Communications is currently a WAIT AND SEE.

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