Nuance Communications a stock to hold on to
May 10, 2012 8:02PM
Updated: June 12, 2012 8:05AM
Dear Mr. Berko: Sometime during the first couple months of 2010, my two brothers and I each bought 400 shares of Nuance Communications at about $22.50 on the advice of our broker whom you recommended to us nearly 10 years ago. I trusted him; so did my two brothers because he was always honest, his advice was mostly on the mark and he had a way of explaining things that we could understand. But he left Durham about four months ago and didn’t tell us where he was going. Our accounts were given to a 30-something kid and all he wants to do is sell us annuities, mutual funds or ETFs. Nuance is now $25 and we need advice. The stock seems to have stalled here, and we need to know if we should keep the stock or take our substantial profit. We asked our current broker, who is a nice person, but he has no opinion and gave us a copy of a Goldman Sachs report that was bullish. We would never be comfortable trusting a Goldman Sachs report and would appreciate your personal opinion.
Dear FR: I’m occasionally in touch with your old broker, whom I first met in 1991 when I spoke to an audience in Durham.
Nuance Communications (NUAN — $23.25) has finally become a successful Star Trek-like technology company. NUAN is one of the worldwide leaders in voice control, voice commands and text- to-speech solutions for desktops, mobile phones, laptops, etc.
NUAN’s home office is in Massachusetts. It also has headquarters in Belgium and Australia, 6,009 employees, sales representatives in 70 countries, over 4,000 patents, one of the largest libraries of speech data in the world and speech solutions that support 50 different languages.
And while its biggest competitors are Microsoft, Oracle, Intuit, Symantec, Citrix Systems, Activision and AVG Technology, NUAN is recognized as the pure play in this field, with $1.4 billion in revenues that have increased 12-fold in the last decade. Earnings look to be strong, and NUAN expects to earn $1.56 this year after a 10-year string of losses. The low P/E ratio of 16 and growing revenues make NUAN look attractive. However, I am concerned about NUAN’s balance sheet that claims over $4 billion in total assets, which I think may be grossly inflated. NUAN’s quarterly report records $3.1 billion in goodwill and other intangibles arbitrarily inflating its balance sheet and shareholders’ equity, which could create serious problems down the road. Wise investors prefer Tangible Book Value, which is what remains after subtracting goodwill and intangibles from shareholder’s equity.
Using this metric, NUAN has a Tangible Book Value of minus $660 million and suggests the balance sheet lacks the strength to protect itself. However, if management can continue to grow revenues and earnings that will create tangible value, the shares should do well. Keep the shares but place an open, good to cancel, stop loss on NUAN at 20 percent below the current price and move it up as the shares increase in value.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.