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Why I Would Buy Tracsis Plc But Sell Quindell PLC

Software companies Tracsis (LSE: TRCS) and Quindell (LSE: QPP) are both focused on transport, but which firm’s shares will travel further and faster?

I believe upside for Quindell is limited and that selling to buy into Tracsis could prove to be a good move. Here’s why.

Quindell

Quindell was on the brink of collapse earlier this year, as aggressive and unacceptable accounting practices unravelled, and the company faced a cash crunch. Disaster was averted at the eleventh hour when Quindell’s new board of directors managed to negotiate the sale of the company’s principal business — the Professional Services Division — to Australian law firm Slater & Gordon, for £637m.

The proceeds of the sale enabled Quindell to clear its debts and announce a return of capital to shareholders. The directors said they expected to return an “initial tranche” of “at least £1 per share and up to a maximum of £500 million in total”, “before the end of November 2015”.

However, the company has this week backtracked on both the quantum and timing of the initial tranche. The directors have said they now expect to return 90p a share, and that the court hearing needed to get legal approval for the return is not expected to take place until 16 December.

Quindell intends to return the remaining 10p a share in November 2016, assuming that the full £50m it placed into an escrow account to cover warranties given to Slater & Gordon is released. And there’s an estimated further £40m (9p a share) to come from the Australian company over the next two years, as historic hearing loss claims settle in the Professional Services Division.

However, the total of 119p isn’t a foregone conclusion. Court approval for a 90p return may not be forthcoming, because Quindell is currently under investigation by the Serious Fraud Office (which could result in fines) and is also facing a class action by shareholders who have lost money (which could result in compensation payments). Slater & Gordon, whose share price has sunk since acquiring the Professional Services Division, may also try to claw back something from the escrow account and seek to minimise its payments to Quindell for the historic hearing loss claims.

Furthermore, Quindell’s retained businesses — which are mainly focused on telematics — are loss making (over £33m in the first half of this year), so, with the shares at around the £1 level, I see little upside potential and plenty of downside risk.

Tracsis

Tracsis, which released its annual results today, is everything Quindell isn’t. Notably, Tracsis is profitable, generates cash and pays a dividend.

The company today reported a 14% rise in revenue to £25.4m, a 16% uplift in adjusted pre-tax profit to £5.8m, and a 19% rise in adjusted earnings per share to 19.16p. Tracsis has no borrowings, while strong cash generation saw cash on the balance sheet rise to £13.3m from £8.9m at the previous year end, supporting a 25% hike in the dividend (although, as with a lot of growth companies, the yield is modest at just 0.2%).

Tracsis is a leading provider of software and technology products and services for the traffic data and transportation industries. The company is well established in the UK and is developing its overseas footprint, where management sees “a significant opportunity for the future”.

The shares are currently trading at 435p, giving a trailing price-to-earnings ratio of 22.7. This falls to 19 on a forward basis, as a result of forecast 19% earnings growth. And the rating become even more attractive if you factor in the cash on the balance sheet, which represents almost 50p a share.

Given Tracsis’s strong record of earnings growth, near-term forecasts and longer-term prospects, I see far greater upside potential for this company than for Quindell.

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G A Chester 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.