2015 has been a torrid time for most legal stocks, with the high profile struggles of Slater & Gordon Limited (ASX: SGH) dominating headlines for the sector.
But IPH Ltd (ASX: IPH) has managed to sidestep those issues and double its IPO price, delivering early shareholders over 100% returns. But despite this, the company has somehow remained under the radar of most investors and the media.
So can the business continue to achieve market-beating returns given its recent success?
Not "those" lawyers
Slater & Gordon are the better known type of law firm that specialises in personal injury and insurance litigation. This type of law is sometimes referred to unfairly as ambulance chasing. What is not unfair, however, is the conclusion that Slater's business model relies on high volume and low margin litigation.
In contrast, IPH Ltd is a completely different kind of law firm. It specialises in intellectual property law. In the past, intellectual property law was something of a niche business, with things like copyright of published works and protection of trade secrets the bread and butter of the practice.
However, in recent years, the importance of intellectual property law has multiplied exponentially.
Global Forces
There are two major forces driving demand for the services that IPH offers. The first is the fact that globalisation has meant that any regional product can now be reproduced quickly in another market, taking valuable profits and expansion potential away. As a result, the protection of the valuable aspects of a process, component or line of code becomes a crucial component of competitive advantage for firms.
The second factor is the fact that software can have global applications but be copied relatively easily. For example, without their proprietary and protected software, multi-billion dollar global giants like Google and Uber would not be able to differentiate themselves and outperform their competitors.
Factors in favour
IPH Ltd also has a range of company level tailwinds at its back. The first is the falling Australian dollar, which is a positive given the firm is diversifying its sources of revenue from outside Australia, including expansions in Asia and the United States.
It also has a market-leading position in intellectual property law in both Australia and Singapore. This means that top-tier clients in those two nations are more likely to use the services of IPH than those of its competitors.
The long regulatory and filing processes that accompany patent and trademark registration also bode well for recurring fees paid by clients to IPH. In addition, if intellectual property is going to be challenged or contested in the courts, it is more likely that clients will seek the services of a top tier firm, especially if the challenge is in an international market and the firm has links there.
The verdict
IPH Ltd is a stock that occupies a number one position in an increasingly important and growing industry with reputational advantages that cannot be easily replicated. These factors mean it is a highly attractive investment proposition, and worthy of close inspection for addition to investors' portfolios.
