Why I Would Buy Tracsis Plc But Sell Quindell PLC

Prospects for Tracsis Plc (LON:TRCS) look bright, but there appears limited upside for Quindell PLC (LON:QPP).

| More on:

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.

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.

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.

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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »