Slater and Gordon Profits Beaten Down — Time to Buy?

Slater and Gordon [ASX:SGH] was one of the worst performing stocks last year. Following a UK court decision that went against the company, and multiple earning downgrades, Slater’s shares were in a downward spiral. In a little over three months, the law firm has dropped 73.8%. Not long after this drop, shares went into suspension, which are only being lifted today.

It’s no coincidence that Slater’s 1H results for FY16 are to be announced today as well. Slater’s shares haven’t been able to recover among the sea of sellers. And it seems their profits are trending down with shares.

Slater made a net loss of $958.3 million, down -2,044.2% for the first half of FY16. ‘Clearly today’s results are very disappointing. In particular the decline in business performance in the UK is of serious concern to all at Slater and Gordon and equally will be of concern to our investors,’ said Slaters Managing Director, Andrew Grech.

It seems fitting that the cause for Slater’s share price decline is the same for their downfall in earnings. Some investors are even gleeful at the signs of Slater’s demise. It was not long ago that Slater told investors that earnings would not be affected. This was straight after the UK court decided to lift the claims eligibility in court.

After Slater’s positive reaction to a difficult situation, bargain buyers weren’t far behind. The market has just beaten Slater’s share price down. But it seemed like it was for no good reason. If the court decision wasn’t going to affect earnings, why not buy up some stocks for cheap?

Slater’s comments were completely misguiding investors. The court decision did affect earnings in the weeks that followed. Safe to say there are investors who lost a lot of money on Slater’s announcements. And, maybe, they’re now hoping for bankruptcy…

Slater will also be hit with a $876.4 million dollar write down to goodwill. Goodwill can extend to the company’s brand name, its customer base, customer relations etc. It’s the intangible assets that make the company great.

And, of course, after Slater’s actions, you could foresee a decrease in goodwill. What it means for shareholder, though, is simply that they can expect more downward pressure on stock prices. While times are tough, Grech believe improvements are around the corner:

We will be taking a number of necessary and significant steps to improve the operational performance of both the UK business and the broader Slater and Gordon Group.

Key Areas

There will be a number of developments and initiatives in rebuilding its brand, making Slater a stronger company in the future. The focus of the next few months will be:

  • A complete strategic review for their UK operations;
  • Changes to business processes and improving their case management system;
  • Aiming to reduce frictional costs and delaying in claims management and resolution;
  • Reducing debt levels over the short to medium term;
  • Executive changes;
  • Strengthening finance function for both Group and UK operations; and
  • Driving operational effectiveness within their Australian operations.

It sure sounds like Slater and Gordon have the right mindset to tackle the problem. Yet can investors trust the word of executives anymore?  My guess is as good as yours. Hopefully, the security and executive changes Slater will be exposed to have some positive effect on honesty.

Yet we still haven’t answered the question. Should you buy Slater and Gordon?

To buy or not to buy

As many predicted, Slater’s share price dropped this morning. On market open shares ripped down almost 40%, to $0.50 per share.

Slater and Gordon Feb

Source: Google Finance

Is this cheap enough? It all comes down to preference. If you are a momentum trader then you might be able to identify an upwards movement in Slater’s share price. It’s common that, once share prices fall hard, prices tend to bounce slightly. It can also be referred to a ‘dead cat bounce’. But it basically symbolises buyers coming in, purchasing a stock they believe is cheap.

This would be one plan to take if you were steadfast on getting into Slater’s stock. Yet if you were a value investor, you would probably stay well away from the law firm. Value investors are only concerned with the health and performance of the company. Share price is a secondary thought.

Combined with Slater’s net loss, amounting to hundreds of millions, their operational cash flow was down $62.5 million. This would send a value investor running for the hills. Slater’s balance sheet is horrible, and their future potential of earnings, while possible, is not reliable.

This is why if you are a value investor you would steer clear of limping companies like Slater. Yet, as I said before, it all comes down to preference. If you’re happy with taking on more risk, then trading Slater’s stock might be a nice thrill. However, it’s not somewhere that I’d happily place my money.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Slater and Gordon may not be a blue chip but they’ve definitely been beaten down. The state they’re in right now leave little hope for the future. Yet there are plenty of beaten down blue chips out there that still have great potential.

According to Money Morning’s publisher Kris Sayce, there are five great beaten down blue chips which could yield impressive returns this year. In Kris’s report, ‘Five Beaten–Down Aussie Blue–Chips to Buy Today’, he’ll reveal the right time to buy these blue chips, maximising your returns.

There’s one common denominator that makes these five beaten down blue chips a buy. If you want to find out why, pick up Kris’ report today. To get your free copy, click here.

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