Company in the news: Quindell

Insurance claims handler Quindell (LSE: QPP) is a controversial business. On Monday it revealed another six-month period of stellar profit growth and its shares soared. But these profits may be too good to be true, and Gotham City Research, an American hedge fund, has bet heavily on the share price collapsing.

Gotham doesn’t like the way Quindell accounts for its sales – recognising them when a claim is processed rather than when cash is received.

Gotham points out that Quindell is very good at reporting big profits, yet cash continues to drain from the business. Eventually profits and cash flow should match up and it’s not surprising or unreasonable that people should question why they do not in Quindell’s case.

For the first six months of this year, profit before tax was £154m, yet there was a trading cash outflow of £51m – a difference of £205m. For the year to March 2014, Quindell had revenues of £380m, but had receivables (cash that had not been paid) of £327.8m, or 86% of sales – a high number.

The lack of cash flow combined with lots of acquisitions and very fast profits growth – perhaps too good – are classic warning signs that investors need to look into. Quindell also raised £200m from shareholders last year and has already burned through a lot of this, raising fears that it might ask for more in the future.

That said, Quindell’s shares trade on just 3.9 times forecast earnings – if you believe this number – meaning that concerns could already be priced in.

On the other hand, the company is burning cash at an alarming rate. You might make a lot of money from this share, but we’d stay well clear.

Verdict: avoid

  • EatMyShorts

    Actually its not Gotham City Capital which is a private, biotech research company, its Gotham City Research which is an alias for a chancer who’s real name is Daniel Yu. The shorting began before the release of the wholly inaccurate report, and suggests market manipulation by Gotham. All allegations were lies to allow a short attack and hold a short position. Shorts appear to be losing strength and a squeeze appears to be imminent. Verdict: Strong Buy

    • Moderator

      EatMyShorts – you are quite right, it is Gotham City Research, not Gotham City Capital. Apologies. We’ve changed the article.

  • EatMyShorts

    Thanks for correcting some of the article. I would urge readers to look at the fundamentals of this company http://www.quindell.com/investor-relations/investor-home. Its becoming a very big player, and its Telematics offering is a big game changer for the Insurance Industry. You can only guess at the sinister reasons behind the attack, but its highly competitive services are seriously challenging its competitors. The share price is ridiculously undervalued, but the large investors have increased their holding since the attack and although some PI’s have taken fright at the bogus report, a large core group continue to increase their holdings and are long and strong. QPP has 4000 employees and continues its vigorous growth into Canada, USA, and the UK with the full backing of its investors. Its cash flow forecasts and growth are very strongly positive. I hold shares in QPP. I think its all mostly positive from now on, but please do your own research.

Merryn

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