For a period of time Slater & Gordon Limited (ASX: SGH) held the crown of being the one and only listed law firm on the ASX.
As is generally the case in capitalist societies however, success breeds competition. Indeed, there are now no less than four ASX-listed law firms, namely:
- Slater & Gordon Limited
- Shine Corporate Ltd (ASX: SHJ)
- IPH Ltd (ASX: IPH)
- Xenith IP Group Ltd (ASX: XIP)
While in the early periods of listed life, both Slater & Gordon and Shine enjoyed staggering share price gains, in more recent times they have both experienced enormous falls…
Why?
Slater & Gordon has only itself to blame for an unbelievably ill-timed UK acquisition which has led to the group writing off around $877 million in goodwill and which is perhaps the single-largest explanation for its plunging share price.
Both Slater & Gordon and Shine share another headwind that has affected investor confidence however. They both have needed to revise their accounting policies which has led to a major change in the reporting of the value of work in progress.
Because the business models of Slater & Gordon and Shine are focussed on a "no win-no fee" offering on personal injury litigation cases there can be a significant lead time between taking on a case which involves internally funding the case and ultimately receiving a potential share of any settlement. In the past this has allowed for a higher level of reported profits than investors expect to occur in the future.
Better business model
In contrast, IPH and Xenith IP are both focused on the provision of intellectual property (IP) legal services. Both of these companies reported increased profits for the half year ending December 31– unlike Slater & Gordon and Shine. Importantly, their revenues are also less lumpy, more predictable and their accounts aren't heavily influenced by work in progress accounting measures. In short, investors have more confidence in the earnings power of these two IP law firms.
Not all law firms are created equally
The destruction in shareholder wealth at Slater & Gordon and Shine is a reminder of the need to assess all stocks on their individual merits and not to assume that just because a company operates with an appealing thematic or in the same industry as a successful company that it too will be a successful business.
That being said, at current prices there is more chance that IPH and Xenith exhibit share prices above fair value and that Slater & Gordon and Shine exhibit prices below value than visa versa. However the risks involved with regards to Slater & Gordon arguably make it one that is best avoided.
