Sunday, November 6, 2011

Nice Systems Offers Recession Resistant Growth?






Nice Systems $NICE is a stock that benefits from increasing security and regularity compliance within financial services. They make the kind of surveillance and monitoring systems that the likes of UBS would have needed to make sure that a rogue trader like Kewku Adoboli might have been picked up early on in his activities. As such, Nice Systems primary profit driver is increasing regulation and awareness of ever complex needs to gather information from multiple sources, both internally and externally.


Nice Systems Equity Research

There is a detailed write up on Nice Systems in a previous post on Earnings View. The post is intended to analyze Nice Systems as a possible stock to buy in the light of recent results and guidance.

Turning back to the original post-referred to above- it’s clear that Nice Systems has done quite well this year.



Feb Guidance
Current Guidance
Mid-Point Change
Full Year Revenue
$775-800m
$792-806m
+1.5%
Full Year EPS
196-202c
205-209c
+4%



The numbers are nothing stellar but it is solid performance and the stock price has moved in a highly correlated manner to the S & P 500. In other words, the stock is flat. The recent earnings were quite good and the company raised guidance but analysts were left enquiring over the book to bill ratio for the third quarter and why it was below one. A number of reasons were given for this on the conference call, which are summarized below

  • Slower customer bookings in the third quarter, some of which were closed in the ongoing fourth quarter
  • Book to bill forecast to be much higher in the fourth quarter
  • Weakness in Q3 not seen in any product line or geography
  • Management explained that the book to bill was also had a pattern of being weaker in the third quarter in previous years, and that this was partly due to the increase in maintenance revenues and the way that business was conducted

All of which, is perfectly feasible but cannot allay particular fears about the macro economic uncertainty creeping into their order book. Moreover, as the share price is tracking the S & P 500, it is perhaps prudent to wait until they confirm a return to a string book to bill ratio in Q4.  That said, Nice Systems rival Verint $VRNT Inc raised full year revenue guidance growth to 9% from 8% in September.


Nice Systems and Verint Systems Recession Proof?

The odd thing about these two stocks, Nice Systems and Verint Systems is that they both increased net income and cash flow through the recession. This is to be understood, as their revenue drivers are relatively secular. However, with Nice Systems, there was a drop in revenues of 6.5% from 08-09 and gross profit fell by 10% However, Nice managed to only lose 7% in EBIT due to reduced SG & A expenses.

This suggests that Nice Systems is relatively recession proof but the problem is that a large amount of the company’s revenue comes from the financial services vertical. Unfortunately, if there is a Sovereign Debt Crisis induced slowdown then it is this sector and its suppliers that will get hit the hardest and, Nice Systems will not be immune from negative sentiment.


Nice Systems Stock Evaluation

No matter, even though the outlook does look uncertain and, investors will want to see the book to bill ratio improve in the next quarter, this stock is an intriguing one to follow for the potential to outperform when/if the Sovereign Debt fears subside. It is certainly not cheap on a PE basis but Nice Systems do generate consistently good free cash flow and as of September had nearly $600m in cash and equivalents on the balance sheet. Its an attractive stock to buy but, for now, its on monitor.