5 reasons to avoid Slater & Gordon Limited shares

Credit: Patrick McKnight

What was one of the most successful shares on the Australian share market between 2007 and early 2015 has become the battering ram of investors over the last 11 months or so.

From a high of $8.07 in April 2015, the share price of listed law firm Slater & Gordon Limited (ASX: SGH) has collapsed more than 95% to just 39 cents today, although it did trade as low as 22.7 cents last week. The shares have gained 6.9% today.

Indeed, seeing what was a multi-billion dollar corporation less than a year ago worth just over $137 million today is sure to raise the interest of some investors looking to make good on a potential rebound. Of course, a rebound could be on the cards, but those investors who buy could just as easily be trying to catch a falling knife.

Here are five reasons why I think it would be wise to avoid buying shares of Slater & Gordon just yet…

  1. Management. When you board a plane, you ought to have the utmost confidence in the pilot that he/she is trustworthy and can get you to your destination safely. It’s the same when investing in shares of any business. Unfortunately, Slater & Gordon’s management team have lost the trust of investors after repeatedly reiterating previous guidance calls (only to alter them days or weeks later), while both Slater & Gordon and its new Quindell business have also been under investigation by market regulators. That’s a clear reason to steer clear.
  2. Impairments. Slater & Gordon paid $1.2 billion for Quindell’s Professional Services division last year, raising nearly $900 million in additional capital from shareholders in the process. At its most recent half-year results, it booked an $814.2 million impairment on the business (now called Slater & Gordon Solutions, or SGS), as well as another $62 million impairment on other assets. That’s a huge waste of shareholder capital.
  3. United Kingdom. Bad turned to terrible for Slater & Gordon when proposed changes were made to personal injury laws in the United Kingdom – the market Slater & Gordon had just paid $1.2 billion to expand into. Basically, the proposed changes would impact compensation claims surrounding minor motor accident injuries, effectively reducing the need for lawyers. Slater & Gordon really lucked out on that one.
  4. Debt. Slater & Gordon has built its business around acquisitions, and it’s accumulated a huge pile of debt in the process. With just $51.9 million of cash and cash equivalents as at 31 December 2015, it had more than $790 million in short and long-term debt.
  5. Financing Arrangements. To make matters worse, Slater & Gordon’s creditors could soon be knocking on the door demanding repayment. The company will meet with its banking syndicate, made up of National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp  (ASX: WBC), in the coming weeks to propose a plan to repay its debts and, if the banks aren’t happy with the arrangement, they could force Slater & Gordon to repay what it owes by 31 March, 2017.

Investors are often told of the benefits of buying shares when they’ve fallen in price. That applies to high-quality businesses that may be experiencing short-term struggles, or when the market is simply selling down their shares.

But in Slater & Gordon’s situation, it seems there are a multitude of reasons why investors have lost confidence in the business, and justifiably so. Slater & Gordon’s shares could rise over the coming years – perhaps considerably – but they’re also very risky and that’s why I think it would be wise to steer clear.

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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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