Its been a challenging recent period for investors in Quindell (LSE: QPP), with shares in the software and consulting services company falling by 44% since their July high of 260p. Indeed, there seems to be little sign of a change in sentiment, as Quindells share price has fallen by 13% in the last week alone. 260p may be a long away off, but can investors in Quindell realistically expect it to recover to its highs?
As mentioned, sentiment in Quindell continues to decline at a rapid rate. Although the company released a very encouraging set of results recently that showed it is making pleasing progress with regards to its top and bottom line, the market is still unconvinced about the companys cash flow. In other words, the market seems to be concerned that Quindell could run out of cash and may need to either increase borrowings or else ask shareholders to inject capital into the business.
This question mark over cash flow stems from the way in which Quindell recognises some of its revenue. For example, with regards to personal injury claims, Quindell pays insurance companies upfront for injury claims. It then estimates the number of cases that will be successful and recognises the revenue in advance in order to match costs against revenues. Sometimes it can be 12-18 months before the cash is actually received by Quindell. This, it is argued, puts considerable pressure on the companys cash flow and means that share placings, such as the 200 million that was raised in November last year, could become a more frequent occurrence moving forward.
This uncertainty surrounding cash flow seems to be the main reason for Quindells share price decline. After all, its profitability remains very impressive and its growth potential is huge. For example, Quindell is expected to increase its bottom line by 43% in the current year and by a further 50% next year. Despite this, it trades on a price to earnings (P/E) ratio of just 3.8.
Indeed, it seems clear that the market is unconvinced about Quindells cash flow. To remedy this it is likely that the company will need to deliver a sustained period of positive cash flow to show that it is strong, stable and heading in the right direction. Although shares in the company are incredibly cheap, they could have further to fall in the short term until Quindell can convince the market, via results, that its cash flow is resilient enough to warrant a return to 260p.
While Quindell’s share price may come under pressure in the short run, there are a number of stocks that could be well-worth buying. So, which ones should you buy, and why?
A great place to start is a free and without obligation guide from The Motley Fool called Where We Think The Smart Money Is Headed.
The guide is simple, clear and actionable – you can put it to use on your own portfolio right away. It could help to give your finances a boost and make 2014 and beyond an even more prosperous period for your investments.
Click here to access your copy of the guide – it’s completely free and comes without any further obligation.
Peter Stephens does not own shares in Quindell.