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Can Slater & Gordon Limited shares rebound in 2016?

It’s been an exceptionally long year for shareholders in Slater & Gordon Limited (ASX: SGH). Before getting to the crux of the issue, here’s a brief timeline of events:

So What?

There are four key things that I believe Slater & Gordon shareholders are now focussed on.

  • Fiscal risks. Although I wrote in an earlier article that SGH was unlikely to go broke, that was before the company retracted its full-year forecasts.
  • Share price. Many investors have lost major chunks of money on Slater & Gordon, and a significant number are watching the company looking to snap up a bargain or profit from short selling.
  • Class Action. Although long-winded, successful class actions can prove expensive for the loser of the case.
  • Revenues and profits. Slater & Gordon has grown profits, earnings per share, and dividends successfully over the past five years, however, debt has ballooned 7-fold since 2012. Investors need to be sure that cash flows keep pace with expenses. Also, and this is easy to forget in the recent woes, investors bought SGH to make money.

Now What?

Reiterating my earlier article, I find it unlikely that Slater & Gordon will go broke as there was room for a significant margin of error in my calculations of the company’s cash flows. However, since management has retracted their previous earnings guidance and it is uncertain how much the company will make – or if it will all be in the form of cash as previously claimed – the fiscal risks associated with Slater & Gordon should be considered quite high.

The share price risks associated with Slater & Gordon are also quite high as a result of the above uncertainty.

As to the class action, I do not believe this is an immediate threat to the company. Class action lawsuits can take several years to resolve and Slater & Gordon could be well on the road to recovery or thoroughly bankrupt by the time a verdict is reached. It is a meaningful risk, but there are more relevant near-term concerns for shareholders.

Combined with the fiscal risks, Slater & Gordon’s revenues and profits are the crux of the issue.  Slater & Gordon Solutions (formerly Quindell’s PSD) has been in the stable less than a full year and it’s already started underperforming. Regulatory changes to UK personal law could have a significant impact on revenues and profits from this segment in future reporting periods.

Foolish takeaway

While it appears that Slater & Gordon is not in danger of bankruptcy, I believe its situation is still too uncertain to make it a worthy investment for the new year. Near-term headwinds appear likely to remain in the UK, and investors must also factor in the possibility of regulatory action over the recent downgrade.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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