Shares in Quindell (LSE: QPP), the infamous insurance outsourcer (and jack of many other trades), are currently trading on a P/E of under 2, based on the Citys expectations for the year just ended in December 2014. Could a stock on such a lowly rating really be seriously overvalued? It could, and Id argue that it is.
The thing is, that consensus forecast is out of date, and was heavily based on claims made by the companys own house broker and nominated advisor, Cenkos Securities, andjoint house broker, Canaccord, who resigned in November. And while Quindells ex-directors have been heavily criticized for their less-than-open approach to communicating with shareholders (like claiming they were buying shares when they were in fact massive net sellers), Cenkos has also come under fire for signing off such misleading RNS releases in its advisory capacity.
With the report into Quindells accounting practices and actual cash flow situation expected any day now, there are no current brokers forecasts available and banging on about that stale P/E valuation is yesterdays news.
So upon what can we based any valuation?
Asset sale
Well, theres been some recent announcements regarding the interest being paid by Australias Slater & Gordon for some of Quindells insurance claims assets, but no sooner does Quindell issue a glowing upbeat claim about how well the talks are going than Slater & Gordon appears to contradict the optimism.
The latest was just this week, with Quindell telling us on 23 February that the indicative terms being discussed would imply a significant premium to the companys market capitalisation. That led to speculations of a 700m takeover offer, which pushed Quindell shares up to the current levels of around 95p.
But almost immediately Slater & Gordon came back with No offer has yet been put to Quindell and there is no certainty that an offer will be put that is attractive to Quindell, or that a transaction will eventuate. Its a fire sale from a firm desperate for cash, and its naive to think otherwise.
Credibility crushed
When Q4 cash flow came in woefully below the companys predictions, the credibility of Quindells management came under fire again and nothing the new bosses have said since has done anything to restore any confidence for me. Quindells banks didnt like the way things looked either, and on their insistence PwC was brought in to conduct an independent review of accounting policies and the cash flow situation.
The report is due any day now, and every day that we have to wait for news is another day that makes me think it wont be positive given Quindells keenness to publicize any scrap it thinks might make it sound good, if the board is happy with PwCs opinions I really cant see a good reason for why its taking so long for us to hear.
Too expensive
So is Quindell really the most overpriced stock in the world? If it eventually crashes to zero, then yes it is because there is no greater over-valuation.
While you might still fancy a high-risk gamble on Quindell, it’s not the kind of investment that usually leads to Buffett-style wealth.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.