The share price of entrepreneurial legal group IPH Ltd (ASX: IPH) has tanked around 13% today after the group logged an adjusted net profit of $23.4 million on adjusted revenues of $69 million.
The group will pay an interim dividend of 11 cents per share based on the company’s policy to dish out 80%-90% of earnings based on adjusted net profit.
The share price falls are the result of the group not quite meeting some lofty expectations built into a share price that has rocketed around 80% over the past year on the back of an aggressive acquisitive growth strategy and market share growth across the Asia Pacific region.
IPH is a holding company for a collection of legal and patent services businesses including the Spruson & Ferguson entity that provide intellectual property advice on patents, trademarks, and related commercial agreements.
Over the half-year the group’s operating entities filed 7,889 patent and 1,763 trademark applications as it continues to deliver organic growth by virtue of a strong reputation and substantial operations in fast-growing Asian markets.
IPH is also a serial acquirer of rivals and says it has a strong pipeline of acquisitions, with no debt and $77 million of cash on its balance sheet to provide the firepower if the right opportunities come up.
On the ASX in general, listed legal services firms have a catastrophic track record with tort law operators Slater & Gordon Limited (ASX: SGH) and Shine Corporate Ltd (ASX: SHJ) both crashing in value after disclosing slapstick accounting practices that resulted in drastic revisions to earnings guidance.
Indeed, successful law firms normally operate under private partnership arrangements, where appointed partners are often entitled to share profits in the business under an equity arrangement. This tends to disincline the powerful partners from taking excessive risks or pursuing reckless growth strategies that have demolished shareholder equity in Slater & Gordon for example.
IPH operates as a holding company for legal services firms in an entirely different practice area and appears to have a sound business model as a leading provider of run-of-the-mill legal and administration services that should offer fixed fee structures and strong cash flows.
The firm delivered half-year earnings per share of 13.6 cents and sells for $8.40 per share after today’s big price falls.
If you assume it can earn in the region of 30 cents per share for the full year it trades on around 28x earnings, which looks expensive despite the balance sheet strength, strong track record, and moderately attractive business model.
Dollar for dollar, insiders are calling it one of the biggest new markets in the history of modern business… NOW is the time to get in on the hush-hush industry that could be poised for growth of over 4,463%+ by 2020… And the 1 ASX stock that stands to grow YOUR money right alongside it! Simply click here to learn its name.
Motley Fool contributor Tom Richardson owns shares in Slater & Gordon.
You can find Tom on Twitter @tommyr345
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.