Legal eagles Slater & Gordon keep flying higher: Should you buy?

Lawyers have a hard won reputation for a love of making money, so why not get some to do the hard yards for you? Slater & Gordon Limited (ASX: SGH) is a growth business run by some entrepreneurial lawyers with big plans to grow in the lucrative United Kingdom legal market. In fact these legal eagles are forecasting around $155 million in post-acquisitions revenue from UK operations in 2014, out of a total revenue forecast of $395 million. A large proportion of Australian revenues are a result of personal injury cases, although the business is now diversifying its fee-earning potential into more general legal services.

With an EBIT margin of around 20% for the first-half of FY 2014, net profit came in at $23 million on $178.3 million of revenue. The group’s revenue diversification strategy is on track and the fragmented UK legal market looks a match made in heaven for a business on an acquisitive trail. It has been able to buy several smaller UK firms on around 3.5 to 4.5 times earnings, with the effects expected to be earnings per share accretive this financial year. Net debt to equity remains at a manageable 24.2% and while consolidation is now important, Slater and Gordon’s shopping spree may not be over yet. An appreciating UK pound over the past financial year should also provide full-year profits a strong tailwind.

The basic business model is to build a leading consumer services legal business based on brand strength and a solid reputation, which goes a long way in Slater and Gordon’s legal fields. Currently it is estimated Slater and Gordon only has around a 5% interest in the UK personal injuries legal market, so if successful the potential is there for much bigger growth.

Selling for $5.15 Slater and Gordon is trading around 17.5 times projected earnings in FY 2014 and around 14 times projected earnings in FY 2015. For a growth business with potential to outperform that looks a reasonable valuation.

Other lawyers on the acquisitive trail recently include rival Shine Corporate Ltd (ASX: SHJ), which is a business that would like to emulate the success of Slater & Gordon. While IMF Bentham Ltd (ASX: IMF) is a litigation funder looking to expand in the high-stakes North American market. There’s one more company I like offering..

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Motley Fool contributor Tom Richardson owns shares in Slater and Gordon. You can find him on Twitter @tommyr345

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