Why Quindell PLC’s “Low” Valuation Is An Illusion

Claims that Quindell PLC (LON: QPP) is on a low P/E are simply not true.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What do people mean when they say Quindell (LSE: QPP) shares are cheap?

They usually mean the shares are on a very low price to earnings (P/E) ratio, and quote a figure of something like 2 based on the company’s expected 2014 figures. A P/E like that is exceedingly low compared to the FTSE 100 average of around 14, and if Quindell is as healthy as the average FTSE company, then its share price should surely be around seven times the current level of 123p — which is £8.60!

The most recent 72.5p EPS forecast consensus for 2015 even indicates a forward P/E of 1.7, which by the same reasoning would suggest a share price of over £10!

Stale consensus

But that consensus was three months ago, and since the PwC investigation into the company’s accounting practices and financial situation was announced, all forecasts have been withdrawn. There hasn’t been a broker’s recommendation since October. Even then, of only four forecasters, three were associated with Quindell itself.

Cenkos Securities is the firm’s current broker and AIM nominated advisor. And we never listen to a company’s own broker when it comes to forecasts, as they’re pretty much obliged to wax positively if they want to keep the job. Besides, Cenkos has come under criticism of its own for signing off on some of Quindell’s most misleading RNS releases.

Canaccord Genuity was the company’s joint broker and advisor, but resigned from the job back in November and hasn’t issued any forecasts since. Again, we’d really be wise to omit Canaccord’s recommendation from our deliberations, and that’s even without the resignation — I’ll leave you to decide what to make of that.

Daniel Stewart made money from supplying Quindell with broking, advisory and research services — the firm took warrants as part payment for its services, but has since exercised them and sold. Again, very much not a disinterested party during its association with Quindell.

Historic, surely?

But what about those historic earnings per share figures which showed storming rises and are expected to reach 58.4p per share for 2014?

Well, the problem there is that those figures have not been based on actual realised profits or cash, but instead on Quindell’s accrued profits estimations. That’s not even business invoiced but not yet paid — with Quindell’s insurance claims business requiring it to pay to take on cases that it might not ever get round to billing, it’s based on predictions of the profit it might someday get from business it can’t even charge for yet.

And that’s what the PwC investigation is all about. Numerous experts have seriously criticized the amount of accruals that Quindell has been claiming, with some opining that they are significantly higher than the industry average. PwC will hopefully give us some realistic figures, and who knows, Quindell might have been spot on with its estimates all along!

But if it turns out like that, I’ll eat my hat. In fact, I have nine hats and I’ll eat them all, together with a couple of pairs of shoes.

Wait for it…

The bottom line is that, while we know the P that goes into the P/E ratio, we have no idea of the actual E whatsoever, and any attempts to put a figure on it are currently illusory. If anyone tries to tell you otherwise, spit in their eye. And wait for the report.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »