Nuance Communications, Inc. (NUAN)

[chmcnfunds]

Nuance Communications - Time For Management To Disinvest

Dec. 30, 2014 3:00 AM ET | 4 comments | About: Nuance Communications, Inc. (NUAN), Includes: AAPL
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

NUAN has established leadership in a growth industry.
Earnings have stabilized.
NUAN is diversified across many industries.
Icahn has a large stake and is known for obtaining shareholder value by splitting up whole into parts.
Nuance Communications (NASDAQ:NUAN) is recognized as the premier voice and recognition technology company. It has become the predominant player in what was previously a fragmented industry. NUAN spent over four billion dollars in buying out its rivals, outspending its free cash flow while increasing debt and reporting decreasing margins to fund the acquisitions.

The stock price is currently off about 20% from its 52 week high and almost 50% off from its 3 year high. Time to change strategy. Instead of licensing deals, the game plan is now growth from recurring revenues. For the full 2014 fiscal year, NUAN received 64% of its overall adjusted revenue from recurring revenue, up from around half in fiscal 2012. Licenses represented just 26% of adjusted revenue, down form 38% in 2012. Nuance clearly established a successful shift in executing its new strategy as it beat estimates for the recently completed quarter and provided 2015 guidance reflecting organic revenue growth and stability in operating efficiency, providing investors with reasonable expectations of what to expect from the now dominant player in a growth industry.

The technical picture also indicates that the stock has found solid bottom support. The chart indicates a very positive double bottom has formed. In the meantime, hedge funds have become interested. Most notably, activist Carl Icahn has taken a very large position.

Icahn is known for taking a stake in a company and forcing the company to enhance shareholder value by buying back shares, increasing the dividend or breaking itself up. Here's the problem for Icahn....NUAN's acquisition strategy has resulted in a company that serves multiple segments, including automotive, healthcare, mobile, imaging and consumer sectors. Healthcare represents about half of revenues. There aren't any potential suitors who would be interested in acquiring the company as a whole unless it would be as a defensive move to prevent a rival from acquiring it.

Potential takeovers have stirred the pot. Apple (NASDAQ:AAPL) is a major customer of NUAN's as it uses Nuance's technology for its voice recognition system for the iPhone, known as SIRI. AAPL has been rumored to be interested in acquiring NUAN or perhaps to be pressured into the move by Icahn who has an ownership interest in AAPL. NUAN's stock fell on news that AAPL has been developing its own voice recognition software, but then came rumors of Samsung as a potential suitor that have not let to anything so far.

On fundamentals, NUAN looks cheap. The forward P.E. of 12 and a PEG under 1 are clearly lower than comparable tech stocks. The forecasted growth rate is over 20%. Deutche Bank has a price target 44% higher than market price. Morgan Stanley sees 20% upside. There are several analysts coming in between Deutche Bank and Morgan Stanley's forecasts.

NUAN has over 4,000 patents and patent applications, serves over two-thirds of Fortune 500 companies, offers software in over 50 languages, and is clearly the leader in its field. The chart, the earnings and the fundamentals indicate that a bottom has been formulated. Icahn first established a position in NUAN in early 2003. His brand of shareholder activism may result in realizing a boost to shareholders from splitting up the company and making it easier for Apple or Samsung or perhaps someone like Microsoft to come around and buy. In the meantime, the biggest downside risk in buying NUAN shares is that Icahn loses his patience and sells his stake.
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http://seekingalpha.com/article/2786945-nuance-communications-time-for-management-to-disinvest?uide=996949&uprof=46

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