This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include an upgrade for Mississippian banker Renasant Corp. (NASDAQ:RNST), a downgrade for Nuance Communications Inc. (NASDAQ:NUAN), and for Limited Brands, Inc. (NYSE:LTD), a higher price target.
A bigger banker down South
We begin the day on a bright note, as Mississippi banker Renasant scored double upgrades from Stephens and Wunderlich this morning. Both bankers say Renasant’s a buy now, and it’s easy to see why.
Yesterday, Renasant announced it’s merging with First M&F Corporation, parent company of Merchants & Farmers Bank. The news sent M&F shares flying — up 39% on the day — but Renasant shares headed in the opposite direction. The weird thing, though, is that even the steep premium (to then-current prices) Renasant paid for M&F let it acquire shares for just 1.2 times tangible book value, while Renasant’s own shares were selling for 1.6 times tangible book. This suggests the banker got itself a nice bargain, and helps to explain Wall Street’s optimism about an acquisition that most investors decided to shun.
And yet… could the reason behind this apparent bargain price be not so much that M&F was underpriced, as that Renasant was overpriced — and still is?
Priced at 18 times earnings today, Renasant shares don’t look particularly attractive in light of a long-term earnings growth rate that’s predicted to average just 7% annually. Even with a 3.5% dividend yield, it’s hard to argue the shares are undervalued today.
Nuance gets overlooked
Dragon NaturallySpeaking software maker Nuance beat revenue expectations, but “missed earnings” by a penny yesterday, reporting $0.35 per share GAAP, versus the $0.36 Wall Street was expecting. The news prompted triple downgrades on Wall Street this morning, as each of Craig-Hallum, Needham & Co., and Stifel Nicolaus pulled their buy ratings on the stock, and downgraded to hold.
Needham’s note held the most detail, pointing out that the real pessimism over Nuance concerns not the penny missing from fourth-quarter 2012 earnings, but the warning that gross margin in 2013 could be down as much as 250 basis points (2.5 percentage points), while revenues will be weak until toward the end of the year.
Now here’s the problem. Investors might have been more inclined to trust Nuance, and wait out a decline in revs if the stock was cheap — but it’s not. Indeed, based on trailing-12-month earnings of $176 million, Nuance shares now cost more than 35 times earnings. And that’s before you factor in the company’s $1 billion in net debt, or ding the company for the cash-cost of its serial acquisitions, by virtue of which it’s possible to criticize the company for running free cash flow-negative for more than two straight years.