Its been a tough few months for investors in Quindell (LSE: QPP), with shares in the professional services and digital solutions company falling by a whopping 28% since the start of July. Clearly, this is hugely disappointing but, after releasing a positive set of interim results recently, could Quindell have a much brighter future ahead of it? Furthermore, is it really worth adding to your portfolio?
As mentioned, Quindells interim results for the first six months of the financial year were very upbeat. The company posted year-on-year revenue gains of 119%, with adjusted earnings per share (EPS) increasing by 79% over the same time period.
Furthermore, Quindell confirmed that it remains on track to meet its previous guidance for the full-year and expects to post revenue of 800 million to 900 million for the full year. If met, this would represent an increase of 2.4 times last years revenue. Overall, a strong set of results that show Quindell is well positioned for future growth.
While on the topic of growth, Quindell appears to be enjoying something of a purple patch. Over the last two years, earnings have grown by 99% and 74% respectively, while over the next two years the bottom line is set to increase by 43% this year and by a further 50% next year.
Clearly, this is an extremely strong rate of growth and, indeed, it would be tough to find many companies that can beat such a strong record and bright future.
You would expect such impressive growth potential to command a premium when it comes to Quindells valuation. However, with news that Quindells much-anticipated free telemetrics roll-out with the RAC is off, as well as issues with its working capital management causing investor sentiment to weaken, shares in the company currently trade on a price to earnings (P/E) ratio of just 4.3.
Clearly, this is incredibly low especially when the companys growth prospects are taken into account. However, it is not low without reason. Indeed, some investors seem to be uncertain of Quindells business model and, more specifically, with how it recognises revenue.
This uncertainty centres around the nature of part of its business, where it apparently pays insurers upfront for each injury claim, estimates the proportion of cases that will be successful over a 6 to 18 month period and records revenue for those cases prior to cash being received. This, it is argued, puts pressure on the companys working capital and leads to weak cash flow.
So, while Quindell looks to be performing well as a business, is cheap and has strong growth potential, market sentiment could remain weak over the long term. Indeed, investors seem to be unwilling to rerate the shares upwards due to perceived negatives with regard to the companys cash flow and business model.
As a result, while Quindell has its merits, weak market sentiment could persist over the medium to long term, which means that these 5 companies could prove to be better buys.
With a potent mix of dependable dividends, exciting growth prospects and low valuations, these 5 stocks could make a positive contribution to your portfolio. They could help you retire early, pay off your mortgage, or simply increase your net worth.
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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.