Slater & Gordon Limited jumps 220% in 2 years, is it too late to buy?

Slater & Gordon Limited (ASX: SGH) has been one of the best performing small(er) cap stocks on the ASX over the last three years. After hitting a low of $1.50 in early 2012, the legal firm’s shares have staged an incredible run to trade at around $6.50 today. The 270% rise has been spectacularly rewarding for investors that held on through the negative press relating to ex-prime minister Julia Gillard and some pessimistic broker forecasts.

Outstanding Growth

Slater & Gordon has been able to grow net profit from $25 million in the 2012 financial year to over $60 million last financial year, a 145% rise on just a 90% rise in revenue. This indicates that the company is scalable and can grow profits faster than revenue, a feature that analysts expect to continue into the future.

Positive Outlook

Analysts have been pleasantly surprised by the success of the company’s UK and Australian growth plans and are forecasting compound annual profit growth approaching 20% for the next two financial years.

Slater & Gordon currently trades on a trailing PE ratio of nearly 22, and an appealing forward PE ratio of 17 (2015) and 14 (2016). These forecasts are based on a continuation of the group’s acquisition strategy to grow market share in the UK and Australia.

Competitive Position

Slater & Gordon have achieved such incredible results by positioning the company as the dominant personal injury lawyers in Australia. The company has since expanded to other fields and is developing an ever-increasing presence in the UK personal injury market.

Slater & Gordon employs nearly 3000 people between the two locations, which is expected to increase as its UK market share increases from around 5% currently to 10% in 2017 and 12% in 2019, according to analysts.

The UK legal market is around five times larger than the Australian market, making overseas success increasingly important to shareholders returns. Most brokers are positive about the company’s chances in the UK, and Slater and Gordon conveniently keep an archive of broker research on their website for investors to review.

Another Terrific Idea

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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