I want to share two companies with you today. One has lost my interest, the other has gained my interest.
Roller-coaster ride for Quindell shareholders
Well, didn’t shares in Quindell (LSE: QPP) just rocket out of the starting blocks on Monday. What a ride! The insurance outsourcer had a spectacular day, up 30% by the close to 110.5p. It was very welcome news for investors in the insurance claims processor after having seen the share price of Quindell fall 85% over past 12 months. Pity it didn’t last, down again yesterday by almost 20%.
What’s behind all this share price action? Richard Rose, chairman of internet retail group AO World, and the former chief executive of insurance group Old Mutual, Jim Sutcliffe, were both appointed chairman and deputy chairman respectively earlier in the week.
The appointments bring expertise to the board but the decision to bring these two on didn’t come without controversy. Richard Rose, for instance, will receive 8.7 million share options as part of his package. It actually goes against the UK’s Corporate Governance Code. This Fool isn’t entirely sure it’s such a bad thing, though. By attaching such an obvious link between the performance of the company and the board’s pay packet, you may start to see more accountability. On the flip side, I noticed that some of the options can be exercised within a 12 month timeframe… that’s not so great. All in all, though, the share options granted on Monday represent 7.1% of Quindell’s issued share capital, so whether it works or not, the chairman and deputy chairman will be feeling the heat in the coming months. Given the company’s recent past, I don’t think that’s such a bad thing.
As an aside, keep in mind too that Quindell’s books and accounting policies remain subject to an independent review by PwC. I can’t think of a better platform for this company to build from — if these reforms are successful — but Quindell isn’t out of the woods just yet. Watch this space because it’s a space worth watching.
Morrisons is as sad and sorry sight
The market got a bit of a shock last year when Wm Morrison Supermarkets (LSE: MRW) posted a half-year pre-tax profit of £181 million — a fall in earnings of around 51%. Even today the share price is down between 25% and 30% for the year.
This week analysts were expecting Morrisons to deliver a 3.8% fall in like-for-like sales over the Christmas trading period. The results actually came in better than that — down just 3.1% but it still doesn’t cut the mustard.
I’d like to think the latest management refresher will improve things but are we just kidding ourselves? It’s a bit awkward for fans of the supermarket chain but even a short run-through of the numbers shows the company just doesn’t stack up anymore.
Morrisons achieves only 72% of J Sainsbury’s revenue, and a mere 27% of Tesco’s turnover. Its return on investment is 6.39%, compared to Sainsbury’s 7.18% and Tesco’s 7.80%.
Its net profit margin is also the weakest at 2.7%. Sainsbury’s is slightly better at 2.84%, while Tesco is out in front at 3.8%
From a “financial strength” point of view, it’s the weakest too. Morrisons has a quick ratio 0.2. Sainsbury’s ratio is double that at 0.49. Tesco’s sits at 0.5.
This is all a very long-winded way of saying that — generally speaking — all the supermarkets are facing an incredibly challenging time right now. As such, the last thing this Fool would want to do is throw his money behind one of the worst financial performers in the sector: Morrisons. There’s just no room for that sort of company in one’s portfolio.
Some may argue the dividend is worth considering. That’s true. Morrison’s dividend growth rate is far superior to its peers and its dividend yield, at 7.5%, is hard to overlook. The obvious question remains, though… can it be sustained/maintained? I’m not sure about that, especially considering this week’s resignation of CEO Dalton Philips. In fact, City analysts now expect further volatility in the share price and a reduction in the dividend.
