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The IPH Ltd share price is up 153% since January: Should you sell?

Shares in intellectual property representative IPH Ltd (ASX: IPH) have been on a tear since listing late last year, rising 150% in that time as investors buy into the company’s buoyant prospects.

source: Google Finance

source: Google Finance

The value of IPH has soared due to strong investor interest as well as results; revenue rose 23% in the past twelve months, while profit after tax attributable to shareholders fell 3% due to company reorganisation. On a pro-forma basis however, Net Profit After Tax rose by 41% to $30 million.

IPH has future growth prospects, particularly in south-east Asia, while its Australian operations are quite mature and vulnerable to a loss of market share. With a majority of revenue coming from patent design, which involves filing for and subsequently protecting intellectual property, IPH also appears to have a sticky client base, which leads to a lot of recurring revenue and can minimise the costs of attracting new customers.

On the downside, the business has been very trigger happy with handing out new shares in return for acquisitions. This leads to some risks and uncertainty over how much additional value is generated by greater size. Company reports show that more than a quarter of revenue is spent on employee expenses while some 60% of cash flow is spent on payments to suppliers and employees. This percentage may fall somewhat in the future if the company’s investment in technology pays off in productivity and efficiency.

As a result, IPH looks to have decent margins for a law firm and its business could scale up reasonably well with size. However, the company only earned $30.5m in profit last year, which means that at today’s prices the company trades on a Price to Earnings (P/E) ratio of 42, which looks expensive.  There are several other companies with similar levels of growth out there trading for much cheaper prices and, as a result, I would not buy shares in IPH today.

Investors looking for a similar company could check out Xenith IP Group Ltd (ASX: XIP), which has many features in common with IPH. Xenith recently debuted and has risen just 20% from its IPO (Initial Public Offering) price, making it look substantially more attractive than IPH today.

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Motley Fool contributor Sean O'Neill 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. 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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