Earnings

Which of 2 stocks would appeal to long-term investors? Rowan Companies plc (RDC), Nuance Communications, Inc. (NUAN)

The shares of Rowan Companies plc have increased by more than 6.90% this year alone. The shares recently went up by 3.08% or $0.5 and now trades at $16.74. The shares of Nuance Communications, Inc. (NASDAQ:NUAN), has jumped by 2.69% year to date as of 09/19/2018. The shares currently trade at $16.79 and have been able to report a change of 1.27% over the past one week.

The stock of Rowan Companies plc and Nuance Communications, Inc. were two of the most active stocks on Wednesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: -4.40% versus 7.90%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that RDC will grow it’s earning at a -4.40% annual rate in the next 5 years. This is in contrast to NUAN which will have a positive growth at a 7.90% annual rate. This means that the higher growth rate of NUAN implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. RDC has an EBITDA margin of 41.59%, this implies that the underlying business of RDC is more profitable. The ROI of RDC is 2.70% while that of NUAN is 0.40%. These figures suggest that RDC ventures generate a higher ROI than that of NUAN.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, RDC’s free cash flow per share is a negative -0.3, while that of NUAN is positive 4.29.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for RDC is 6.10 and that of NUAN is 1.30. This implies that it is easier for RDC to cover its immediate obligations over the next 12 months than NUAN. The debt ratio of RDC is 0.00 compared to 1.32 for NUAN. NUAN can be able to settle its long-term debts and thus is a lower financial risk than RDC.

Valuation

RDC currently trades at a P/B of 0.41, and a P/S of 2.06 while NUAN trades at a forward P/E of 13.72, a P/B of 2.79, and a P/S of 2.41. This means that looking at the earnings, book values and sales basis, RDC is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of RDC is currently at a 4.62% to its one-year price target of 16.00. Looking at its rival pricing, NUAN is at a -10.45% relative to its price target of 18.75.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), RDC is given a 2.40 while 2.00 placed for NUAN. This means that analysts are more bullish on the outlook for RDC stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for RDC is 4.09 while that of NUAN is just 4.86. This means that analysts are more bullish on the forecast for RDC stock.

Conclusion

The stock of Nuance Communications, Inc. defeats that of Rowan Companies plc when the two are compared, with NUAN taking 6 out of the total factors that were been considered. NUAN happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, NUAN is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for NUAN is better on when it is viewed on short interest.

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