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Is The Slater & Gordon Limited Recovery A Dead-Cat Bounce?

A version of this article originally appeared on Fool.com.au

The share price of Slater & Gordon Limited has doubled in value since last Friday as the wild price swings reflect analyst and investor confusion over the law firm’s outlook.

Analysts were quick to swing the axe on price targets for the firm last Thursday after the company announced that proposed amendments to UK legislation around damages for personal injury claims may impact its outlook.

It’s no big surprise that the analysts were quick to slash their price targets as on first blush the proposed changes would appear to have a serious impact on the firm’s newly acquired Slater & Gordon solutions business.

In effect they would mean road traffic accident victims with a cause of action for a quantum less than GBP5,000 would have to go direct to the defendant’s insurer and cut out de facto legal services on the terms they are able to be provided today – these terms may encourage claimants to pursue claims on spurious grounds due to the service fee structures.

Notably, the changes could mean lay people likely having to familiarise themselves with the torts of negligence and principles of reasonable foreseeability, alongside the finer points of the civil procedure rules, which means they will be universally opposed by the legal profession in the UK.

However, it seems likely that some kind of reform will be introduced in this area including the banning of general damages for soft tissue injuries, which is generally the lowest form of compensation awardable and very low margin work even for an efficient claims management company. Moreover, the proposed changes would not stop some of the claims management services that are provided by Slater & Gordon solutions, indeed they may even increase demand for them if lawyers are cut out the process.

The lifting of the small claims limit (if enforced at the proposed level) would have significant ramifications, although it is not possible to eliminate the tort of negligence and as Slater & Gordon management stated: “The proposals do not eliminate the right to claim compensation, or the opportunity for people injured in road traffic accidents to obtain advice and assistance with road traffic accidents”.

There’s no escaping the fact these proposed changes are bad news for Slater & Gordon, with the removal of the general damages limit seemingly impossible to adapt to; however, I expect Slater & Gordon management will work to adopt its claims management business to avoid the worst of the consequences to the increase in the small claims limit. Clearly these changes are significant, but the large cuts to some analysts’ price targets may prove a wild overreaction in time.

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The original writer of this article, Motley Fool contributor Tom Richardson, owns shares of Slater & Gordon Limited. You can find Tom on Twitter @tommyr345

Neither The Motley Fool UK nor The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.