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McMillan Shakespeare Limited share price sinks on class action news

It hasn’t been a great start to the week for the McMillan Shakespeare Limited (ASX: MMS) share price.

In morning trade the shares of the salary packaging specialist are down 5% to $13.29.

What happened?

This morning a report in the Australian Financial Review stated that a class action against McMillan Shakespeare was being prepared by a Sydney law firm.

Management has responded by advising that although full details have not been provided, it understands that a claim may be served based on allegations of unconscionable conduct in relation to a warranty product business operated by a subsidiary of its Presidian business.

McMillan Shakespeare acquired Presidian, a finance products provider to the automotive industry, in 2015 for $115 million. The warranty product business in question contributes approximately 5% of the company’s total underlying net profit after tax.

At this stage no claim has been served on Presidian. As a result, management doesn’t believe it is appropriate to comment on the likelihood or merits of the proposed claim.

Should you buy the dip?

I would suggest investors stay clear of McMillan Shakespeare until the full details of the claim are known.

Whilst the claim may prove to be inconsequential, I believe it is better to err on the side of caution.

Until then there are plenty of other options in the industry for investors to choose from such as SG Fleet Group Ltd (ASX: SGF), Eclipx Group Ltd (ASX: ECX), and Smartgroup Corporation Ltd (ASX: SIQ).

Alternatively, you could avoid the industry altogether and focus on these quality blue-chip shares instead.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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