It's been a very busy start to the year at Australia's largest law firm, Slater & Gordon Limited (ASX: SGH).
In addition to its huge $1.2 billion acquisition of the Professional Services Division (PSD) of embattled UK holding company, Quindell Plc; Slater & Gordon has posted strong organic growth and paid out its biggest ever interim dividend.
For investors, this has resulted in a 20% surge in share price in a little over three months – doubling the broader S&P/ASX200's (ASX: XJO) (Index: ^AXJO) 9.5% gain.
However, with shares now up 400% in five years and a very big acquisition yet to be digested, now could be the ideal time to consider taking some profit off the table.
Currently, Slater & Gordon shares trade at a price-earnings ratio of 26.
Here's why the investment case has changed…
As with many companies pursuing a 'roll-up growth strategy' (whereby public companies buy smaller rivals to consolidate the industry and derive operational synergies), it's best to be there for a good time, not a long time.
Indeed, with Slater & Gordon taking on such a large acquisition, arguably, the short-to medium-term outlook and forecast for earnings per share (EPS) growth has become more uncertain, subjective and complicated.
For example, at today's prices, even if Slater & Gordon can grow EPS at 15% for the next three years, and 10% between years 3 and 10 (which is a very tall order for any company over the long-haul), the value risk-reward proposition is not skewed in favour of investors, in my opinion.
All considered, from today's prices, I do not expect Slater & Gordon shares to handily outperform the market. I believe it's less likely to do so now, than it was three months ago.
Should you Buy, Hold or Sell?
Shareholders on the company's register at 7pm (Melbourne time) on Thursday 2 April 2015, will have the right to buy two new shares for every three Slater & Gordon shares they held, at a discounted price of $6.37 per unit. The money raised from this retail offer, as well as the associated institutional share issue and debt raising, will be used to acquire Quindell's PSD.
As a shareholder in Slater & Gordon, I'll take part in the offer for the discounted shares (remember: so long as the market price remains above the offer price for new shares there's an opportunity for investors to make an arbitrage profit by buying the cheap shares and selling them on market).
However, looking ahead into the near future, I'll likely start to take a large portion of my paper profits off the table and reduce my exposure. Whilst the potentially significant upside from the PSD acquisition could be realised sooner rather than later, I think Slater & Gordon's valuation has become somewhat stretched given the uncertainty looking ahead.
