A recent run-up in December of the price of telematics provider Quindell (LSE: QPP) has got some analysts prompting investors to jump on board the stock, which dropped 79% in 2014.
But that’s a dangerous bet to make: problems that were sparked last year are likely only the start of bigger woes for this chaotically managed company, which is struggling to provide any evidence it can deliver on what appear to be false promises made to shareholders over the last three years.
The company boasts that by taking over Mobile Doctors in 2011, it was able to increase revenue to over £50m, and that a subsequent acquisition of Ai Claims Solutions further increased revenue three-fold and made it an appealing bet to insurers.
On the surface, bold claims of revenue enhancement looked true for a while: last time the company reported revenue for the first half of 2014 it claimed it had made £357.3m in sales.
However, the company’s cash position had by then also dwindled nearly 90%, to £18.9m, and bullish promises of providing all cars in the UK with fleet-tracking devices were looking more like hype than heat.
Alarm bells were rung loud at the end of 2014 when the company’s chairman Robert Terry was ousted from top spot, who subsequently unloaded 25 million shares onto the open market in December.
A More Defined Target
The real problem with investing in Quindell is that this investment strategy blindly overlooks the key reason investors would want to buy a provider of fleet-tracking software: to capture the potential of being involved in what might become a takeover target in the next 24 months for a major road insurance company such as AA or RAC.
In an industry with the potential for big market scale, but where hype and over-promotion seems to be the dominant characteristic, you want to look for the companies that are producing real, measurable results for customers where those relationships are likely to still be around in five or ten years time. Those are the companies that make the most interesting potential acquisition targets.
If you’ve made money on Quindell in the recent run-up, and still want to stay invested in the sector, look to a more wholesome and better-valued option than Quindell.
Quartix (LSE: QTX) offers a compelling investment case. In contrast to Quindell’s perception-before-product approach to doing business, it has been steadily building a nice solid business supplying niche, relationship-focused customers such as Larne Borough Council and Apex Lifts over the past decade, when the technology first appeared on the market. Quartix has been in business since 2001, considerably longer than Quindell’s three-year sojourn around British motorways.
Crucially, Quartix’s management understands what Quindell’s doesn’t: that fleet-tracking device installation is not a one-size fits-all business model. For insurers, it’s only feasible to adopt the software for customers with premiums over the £700-£800 per year mark, since the cost of installation and running it is already around £150 per year.
A portfolio of strong customer relationships and a solid management team make Quartix a much more viable takeover target than others in the sector, and especially Quindell. Management’s control over its business is borne out in the company’s earnings. The company estimates that it will earn £4.9m in EBITDA during 2014, with a 14% increase in sales to £15.1m; these earnings follow a 40% rise in EBITDA from 2012-2013, so they look conservative. For 2015, the company is promising shareholders a distribution of 50% of free cashflow to shareholders, so the valuation looks sweet.
That sounds like something with the ring of truth to it, as well as plenty of value and upside: for shoppers such as big insurers looking to get in on the action, that’s usually enough to make them take a closer look.
