How much lower can Quindell PLC go?

Will Quindell PLC’s (LON:QPP) shares drop further?

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.

Last week, insurance claims outsourcing business Quindell PLC (LSE:QPP) (NASDAQOTH:QUPPF.US) came under attack from short-sellers, following the publication of a research report by Gotham City Research.

Gotham’s report claims that Quindell’s business is “built on sand” and that the company’s shares are worth no more than 3 pence. However, soon afterwards Quindell  issued a 12,500 word rebuttal to Gotham’s report, although this response was undermined to some degree by the news that Deutsche Bank had pulled out of a planned roadshow, which had been designed to pitch Quindell to US investors.  

The question is, does Gotham’s argument have any substance and are Quindell’s shares likely to fall further? 

Cash is King

One of Gotham’s main arguments against Quindell is the company’s negative of cash flow. In business, cash is king and if a firm is not generating cash, the company is unlikely to survive.

Gotham points out that Quindell’s cash flow is negative and has been for several years, despite the fact that Quindell has reported over £100m of profit for the past three years.

Still, Quindell’s management has stated that cash flow has remained negative as the company’s directors have decided to reinvest profits expanding the business. Further, Quindell has disputed Gotham’s method of accounting, stating that the research firm’s calculations used to arrive at results were “not meaningful”. 

Broken promises

Another focal point of Gotham’s attack on Quindell is the company’s rising level of debtors. Gotham claims that Quindell is using aggressive accounting techniques to book revenue and income before it’s realized, which would explain the high level of debtors.

Unfortunately, this argument is supported by Quindell’s negative cash flow and implies that although Quindell is reporting rising profits, most of these are on paper.

Quindell’s management has previously promised to reduce debtor levels, but they have continued to rise, hitting £328m at the end of 2013. Quindell’s reported revenue was £380m for the same period. 

Web of intrigue

What’s more, Gotham has called into question Quindell’s seemingly endless stream of complicated acquisitions and related-party-transactions.

The most publicized of these transactions is the £12m invested in Quindell by the company’s founder. Around the time of this investment, Quindell spent £12m building a country club. 

Gotham gives another example, the acquisition of Quindell’s subsidiary, was acquired by Quindell, but then sold to the Quindell’s founder, who sold it back to a third party, which used to acquire telecoms assets before Quindell reacquired the company.

And it seems as if professional auditors can’t make sense of these transactions either, as the company has got through three auditors in the past three years — although I should say that none of these auditors has ever had anything bad to say about Quindell. 

A degree of truth

However, one accusation made by Gotham against Quindell does appear to have some truth behind it.

Gotham claimed within its report that Quindell’s New York office does not exist, so to investigate this claim, the Financial Times sent one of its New York based reporters to investigate.

According to the paper, at Quindell’s New York address there was no sign of the company and the building’s receptionist had never heard of Quindell. Quindell has since removed details of a New York office from its website.

In conclusion

Overall, it would seem as if Gotham’s report has some substance and Quindell’s aggressive accounting techniques are a cause for concern.

That said, Quindell has built up a reputation with some of the UK’s most prominent insurance companies, none of which has had a bad word to say against Quindell and its management.

Still, Gotham’s report has sent shivers down the backs of many investors and Quindell’s future is uncertain. There is nothing the market dislikes more than uncertainty.

On that basis, I feel that Quindell’s shares could fall further unless concrete evidence is produced showing that the company is not misleading investors. 

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.

Rupert does not own any share mentioned within this article. 

More on Investing Articles

Investing For Beginners

How to try and build a £250k Stocks and Shares ISA from scratch, starting in 2024

With a regular savings plan and a smart investment strategy, it’s possible to build wealth within a Stocks and Shares…

Read more »

Investing Articles

I’m considering 3 top UK dividend stocks for my portfolio this July

Mark David Hartley is looking at adding a few dividend stocks to his portfolio this month. Will these three shares…

Read more »

Investing Articles

3 FTSE 100 shares I’d buy to create lasting passive income

Dividend stocks are a great way to build an additional income. Our writer details three FTSE 100 picks she’d love…

Read more »

Investing Articles

After falling 9% in 6 weeks, is this FTSE 100 stock now in bargain territory?

The BAE Systems share price hit a 52-week high on 3 June. Six weeks later, it’s down nearly 10%. Is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I love the look of Entain shares, potentially 47% undervalued

Many FTSE 100 companies have been on a tear in 2024, but with Entain shares down nearly 50%, I think…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Could Aviva shares reach £5.84 in the next 12 months?

Some analysts think Aviva shares could soar nearly 19% in the next year. This Fool takes a closer look to…

Read more »

Investing Articles

I’m looking at a once-in-a-decade chance to buy dirt-cheap FTSE dividend shares

Harvey Jones says FTSE 100 dividend shares have been showing signs of life lately but they're still cheap and there's…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

If I’d put £10k in BAE Systems shares 10 years ago, here’s what I’d have now

BAE Systems shares have been on fire over the last decade. But just how much would a £10k investment back…

Read more »