Nuance Communications' (NUAN) results are getting better but the market is not having any of it. On April 26, the company preannounced great Q2 results that sent the shares higher by about 10%. Since then, the stock has given back nearly all of its gains. The valuation metrics come in mixed on the stock but lean towards undervalued with the trailing valuation metrics suggesting that the stock is overvalued while analysts and on a forward P/E valuation the stock comes in undervalued.
The company is going through a little bit of a transition after its acquisition of Transcend that may be causing some hesitancy on investors' parts. With Transcend, Nuance will accelerate access to and expand its customer base within the small- to mid-size hospital market, which comprises approximately 90% of hospitals in the U.S. and increasingly demands cost effective, voice-enabled, clinical documentation solutions to achieve Meaningful Use and the transition to ICD-10. Below is an in depth look at the valuation metrics and stock chart.
Valuation: Nuance Communications' trailing 5 year valuation metrics suggest that the stock is overvalued at these levels as all of the metrics are above their respective 5 year averages. Nuance Communications' current P/B ratio is 2.9 and it has averaged 2.5 over the past 5 years with a high of 4.1 and low of 1.4. Nuance Communications' current P/S ratio is 5.2 and it has averaged 4.5 over the past 5 years with a high of 5.9 and low of 2.8.
Price Target: The consensus price target for the analysts who follow Nuance Communications is $30. That is upside of 30% from today's stock price of $23.4 and suggests that the stock has room to run from these levels.
Forward Valuation: Nuance Communications is currently trading at about $23 a share with analysts expecting EPS of $1.81 next year, an earnings increase of 11% y/y, for a forward P/E ratio of 12.9. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. Informatica (INFA) is currently trading at about $47 a share with analysts expecting EPS of $1.89 next year, an earnings increase of 17% y/y, for a forward P/E ratio of 24.8. ANSYS (ANSS) is currently trading at about $62 a share with analysts expecting EPS of $3.2 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 19.2. VeriSign (VRSN) is currently trading at about $41 a share with analysts expecting EPS of $2.19 next year, an earnings increase of 18% y/y, for a forward P/E ratio of 18.5. The mean forward P/E of Nuance Communications' competitors is 20.8 which suggests that Nuance Communications is undervalued relative to its publicly traded competitors.
Earnings Estimates: Nuance Communications has beat EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between -2 cents and 1 cents from consensus estimates or about -5.6% to 3.2% from analyst estimates. The company's earnings come been relatively close to consensus estimates which suggests that analysts are good at projecting the company's results and share upside from earnings surprises will be limited.
Price Action: Nuance Communications is up 5.4% over the past year, outperforming the S&P 500, which is up 1.9%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $25.00 and below its 200 day moving average, which sits at $23.76.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.