Why Slater & Gordon Limited shares tumbled 13% today

What: Listed legal services firm Slater & Gordon Limited (ASX: SGH) is once again in the headlines today for all the wrong reasons.

On Thursday the company released an update on its outlook for the 2016 financial year. Here’s what was said…

  • Expected trading results are now lower than expected in segments of the UK business.
  • The approach to financial forecasting has been under review by the new Group Chief Financial Officer Bryce Houghton.
  • Cash timing differences and a poorer-than-expected case resolution profile in the UK business will negatively impact gross operating cash flow for the six months ending 31 December 2015.
  • Goodwill values of the UK business will be tested for impairment at the half-year end.
  • There is a significant risk that full year guidance will not be met. Previous guidance has been withdrawn.

So What: The update is a further blow to investor confidence in Slater & Gordon and it’s not surprising that the stock has once again been sold off  today.

Having closed Wednesday’s trading session at $1.075, the stock fell hard at the open this morning, touching an intra-day low of 81.5 cents.

The stock has since recouped some of its early losses to be trading down around 13% at 94 cents. At these levels the stock remains well above the low hit last month of just 59.5 cents.

Now What: With a market capitalisation of around $330 million, Slater & Gordon has become an interesting risk-reward investment study.

While risks certainly remain and further bad news is likely, arguably much of this is now priced in and reflected in the stock’s share price. The upside reward should a worst case scenario not eventuate is arguably compelling.

For investors who prefer to steer clear of difficult situations, but who are keen to gain exposure to the (generally) profitable legal services sector, two other stocks worth monitoring are Shine Corporate Ltd (ASX: SHJ) and IPH Ltd (ASX: IPH) which both have managed to so far avoid the problems plaguing Slater & Gordon.

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Motley Fool contributor Tim McArthur owns shares in Slater & Gordon Ltd. 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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