5 things to know about the Slater & Gordon Limited share price collapse

No words can describe the anguish felt by shareholders of Slater & Gordon Limited (ASX: SGH) who watched helplessly as their shares more than halved in price yesterday.

The shares plunged to a low of 89.5 cents just after midday before ending the session at 94 cents, down an incredible 51.4% for the day. They’ve lost more than 69% over the last week and 88% since early April and are now trading below their 2007 initial public offering (IPO) price of $1 for the first time.

To put that in perspective, the market is now valuing the company at just $330 million, down from roughly $1.1 billion last week.

Here are five things you need to know:

  1. Existing concerns

Slater & Gordon’s share price had fallen dramatically before yesterday. This was the result of two separate investigations into its accounting activities; its controversial acquisition of Quindell Plc earlier this year (setting it back roughly $1.2 billion); and concerns about its book-keeping processes.

  1. Heavily Shorted

Slater & Gordon has become one of the most heavily shorted companies on the ASX (meaning investors are betting on the share price falling further). According to ASIC, 16.3% of its shares were shorted on 20 November, 2015, meaning any bad news is likely to have a dramatic impact on the share price.

  1. Proposed changes to personal injury law

With that in mind, yesterday’s heavy decline came after the company released a market sensitive announcement. The company spoke briefly about proposed changes to personal injury law in the UK which, if implemented, would impact on the rights of people injured in road traffic accidents.

By increasing the “Small Claims Track” minimum from £1,000 to £5,000, the proposed changes could stop small claimants from using lawyers on a ‘no win / no fee’ basis. Instead claimants would have to apply directly to a defendant’s insurer.

Analysts are already sceptical whether the company can achieve its lofty earnings guidance, so yesterday’s news couldn’t have come at a worse time.

  1. Quindell Plc

As if the Quindell Plc acquisition hadn’t caused enough angst amongst shareholders, the vast majority of earnings from the division (now known as Slater & Gordon Solutions, or SGS) come from road traffic accidents.

  1. Effect on earnings

Slater & Gordon said it doesn’t expect there to be any impact on its performance this financial year (FY16), while it reiterated its guidance for $205 million EBITDAW (earnings before interest, tax, depreciation and amortisation, less the movement in work in progress). However, if the proposed changes are implemented, it could well have an impact on earnings in FY17 and beyond.

As highlighted by The Australian Financial Review, UBS expects a 33% decline in revenue in FY17 while EBITDA could fall by 43%. The AFR said UBS has also set a 90 cents price target on the shares.

Should you buy?

Slater & Gordon’s share price collapse has no doubt intrigued some investors keen to pick up a bargain. Although the shares might look cheap, there is still a multitude of uncertainty surrounding the company and its circumstances which could force the shares even lower from here.

In other words, an investment today would seem more like speculation which is a dangerous game to play.

An alternative for investors to consider is Slater & Gordon’s rival, Shine Corporate Ltd (ASX: SHJ). Shine was also crushed on the news yesterday but noted it has “no exposure to UK market.” Its shares are trading at $1.89 on a price-earnings ratio of 9.3x forecast earnings.

A Billionaire's Investing Secrets - and 2 New ASX Ideas for You

Now you can discover the investing secrets of $60 BILLION man Warren Buffett -- widely recognized as the world's greatest investor. Plus, you'll get two brand new ASX ideas! Your copy of The Motley Fool's brand-new report "The Wisdom of Warren Buffett -- Plus 2 ASX Shares Buffett Could Love" is FREE when you click here.

Motley Fool contributor Ryan Newman 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. You can follow Ryan on Twitter @ASXvalueinvest.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.