TAKING STOCK: Nuance Communications stock

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 ten 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 4 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. So we would like to know where he has gone. 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. FR in Durham, N.C. 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. He divorced his wife of 31 years, gave her every penny of his assets, including a huge home with no mortgage, married a wealthy client 20 years his junior and moved to a Southwestern state, where the accents like those in Durham are so delightful. And that's all I will tell you, except that he's happy as a hog on ice. Nuance Communications (NUAN-$23.25) has finally become a successful Star Trek-like technology company. In the not so distant future, most of us will be talking to our computers rather than memorizing a zillion key strokes to access or manage data. NAUN is one of the worldwide leaders in voice control, voice commands and text-to-speech solutions for desktops, mobile phones, laptops, etc. Tap the voice app on your mobile and ask in a very normal voice: "how many grains in gram" and the response is almost immediate. Access the voice app on your laptop for driving directions from Durham to Denver and detailed directions pop from your printer. 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, including Mandarin and soon maybe Martian. Meanwhile, various NUAN solutions have been shipped in over 5 billion mobile phones and 70 million cars. There are more than 22 million registered desktop users, while over 3,000 US hospitals and 150,000 physicians use NUAN's health care solutions. 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 in a recession or from better-financed competitors. It also suggests a caution flag. 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. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2012 Creators Syndicate Inc. Published: Mon, May 14, 2012