Its been a disastrous three months for investors in Quindell (LSE: QPP). Shares in the AIM-quoted company have fallen by a whopping 31% as investor sentiment has weakened substantially during that time period.
However, after releasing results that stated the company was on-track to meet its key performance indicators and shares having risen by an impressive 10% today, could this be the turning point that investors have been waiting for? Could Quindell at last be about to deliver strong and sustainable share price gains?
On the face of it, Quindells results were highly encouraging. After all, the company met its key performance indicators and delivered stunning increases in revenue and profit. For example, revenue was a whopping 115% higher year-on-year, with adjusted profit an even more impressive 141% greater than the same quarter in 2013. In addition, Quindell stated that it remains on-track to meet its full-year bottom line guidance, with improved margins set to make up for revenue that is due to be below previous guidance.
Despite appearing to be on track, investor sentiment in Quindell weakened following the results. Indeed, questions have been raised by the investment community regarding the companys relatively large amount of accrued revenue from legal cases the outcomes of which remain uncertain.
Furthermore, investors seem to be concerned with management guidance. While it is not unheard of for a drop in revenue guidance to be made up for by higher margins so as to maintain profit guidance, the figures from Quindell sound very optimistic. For example, revenue for the full-year is now expected to be between 750 million and 800 million down from previous guidance of 800 million to 900 million. This is a significant drop and yet profit is apparently going to be in line with prior guidance due to an increase in margins. While possible, margins need to be much, much higher to pick up a reduction in revenue of circa 75 million (8.8%).
So, while Quindell appears to be a company that is delivering strong growth and which trades at an extremely attractive valuation (its forward price to earnings (P/E) ratio is just 2.4), investor sentiment remains very, very weak.
While shares are up 8% today, it seems likely that updates regarding Quindells cash flow, rather than its accrued income, will be needed in order for shares in the company to deliver a prolonged period of growth. For now, then, Quindell seems to be a company worth keeping an eye on, but for whom buy orders should be held back until it can back up accruals with the only thing that really matters in the business world: cash flow.
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Peter Stephens 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.