Where next for the Slater & Gordon Limited share price?

Slater & Gordon Limited (ASX: SGH) upset the market again on Thursday morning when the legal services firm downgraded its earnings guidance less than three weeks after confirming its previous earnings target.

Indeed, the company has been in and out of the news throughout 2015, and for all the wrong reasons. First, there was its controversial acquisition of Quindell Plc’s Professional Services Division (PSD) in the United Kingdom, for which it paid more than $1 billion. Then there were an investigation into its accounting practices being conducted by the Australian Securities and Investments Commission, as well as a probe by UK’s Financial Conduct Authority into some of the operations of other parts of the UK’s Quindell operations.

Just when investors thought the situation couldn’t get any worse, Slater & Gordon’s shares lost more than half their market value in one day after it announced proposed changes to personal injury law in the United Kingdom. The changes, should they be implemented, are expected to have a significant impact on demand for legal services and could thus have a major impact on the group’s revenues and earnings.

That’s when the group reiterated its earnings guidance twice for the 2016 financial year, although investors remained sceptical of the impact from financial year 2017 and beyond.

In yesterday’s update however, it said that its guidance for 2016 has now been ‘reconsidered’ as a result of a review of the company’s approach to financial forecasting under new Chief Financial Officer Bryce Houghton, as well as independent advisors appointed by the board. It’s not a good look for the company, especially considering the most recent guidance confirmation was provided in November.

It also said that although the UK business will make a positive contribution to gross operating cash flow in December, “cash timing differences and a poorer-than-expected case resolution profile” will impact on the gross operating cash flow for the first-half of the year as a whole. To top that off, previous earnings guidance has officially been withdrawn while goodwill values attached to the UK business will be tested for impairment at the half-year end.

Should you buy?

Slater & Gordon’s share price fell 15.2% yesterday and fell as much as 6.2% in today’s session to a low of 83.5 cents. Deutsche Bank currently has a 75 cent price target on the shares and rates the shares a “sell”.

It’s been a terrible year for investors in Slater & Gordon’s shares and, although some investors may be tempted to buy at these prices, there is still a large amount of uncertainty surrounding the company’s prospects. That creates a huge element of risk which should be considered by anyone before buying.

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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.

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