All Eyes Are On Quindell PLC’s Results

quindellA falling share price is hardly an uncommon event at Quindell (LSE: QPP), and we had another one last week after rumours suggested that one of the firm’s biggest contracts, a joint venture with the RAC, is running into trouble.

Quindell responded by saying it “… has not fallen out with the RAC and continues to have a positive relationship, with a number of joint contracts in place including the CCS joint venture“.

Bear run

But a short-selling spree helped push shares of the insurance outsourcing company to a 12-month low of 138p on Wednesday 6 August — although they recovered a little by the end of the day, and stand at 166p as I write.

A trading update ahead of interim results due on Thursday 21 August didn’t result in much joy either, despite the company telling us that it “has met all its key performance indicators for July (cash conversion, adjusted EBITDA and adjusted EPS)“.

It’s good to hear news of cash conversion targets being met, and we also heard that Quindell’s operating cash flow had turned positive in July. Weak cash generation has so far been one of the biggest criticisms leveled at Quindell, and it will be one of the key things to look out for when we get the actual results.

Cash looking better

But net funds were up in July, with the firm’s cash guidance for the full year re-affirmed, and we were told that Quindell remains focused on cash right now ahead of any further growth.

After a short-selling attack earlier in the year inspired by the now-infamous report from Gotham City Research (a firm which stood to gain from a falling Quindell share price), I thought the company was just too undervalued on fundamentals — and I added some to the Fool’s Beginners’ Portfolio in June.

Quindell’s earnings per share (EPS) has risen massively in recent years as the company has grown by acquisition, and forecasts for this year and next look good — analysts are suggesting a 45% rise to 55p this year, followed by a further 43% to 79p in 2015.

How cheap?

And here’s where it gets really interesting — those forecasts put Quindell shares on a forward price to earnings (P/E) ratio of just 3 for 2014, dropping to 2.1 a year later. Against a FTSE 100 long-term average of around 14, we’re looking at either a gross misreading of the company by the investment institutions, or something very wrong under the surface at Quindell.

The “something wrong” scenario comes from a lack of belief in Quindell’s ability to turn its paper profits (which include cash that has not been collected) into the actual folding stuff.

But with Quindell expecting operating cash outflow to remain flat and cash inflows to rise to £30-40m by the final quarter, I reckon the fears are overdone — and if Quindell can show us the cash, we could easily see the share price re-rated.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool 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.