IPH Ltd (ASX: IPH) has seen its share sink more than 40% since the start of this year, and the current share price of $5.25 is a long way from 52-week highs of $9.43.
So what is going on?
Firstly, the intellectual property (IP), patents and trademarks firm had seen its share price pushed up well beyond its value in 2015 and was due for a correction.
That came in the form of a disappointing first half result released in February. But even after a 13% fall on the day, shares were still trading around $8.40 and sporting a relatively high P/E ratio of 32x 2016 full year (FY16) earnings of 26.2 cents.
IPH is a serial acquirer and has made a number of acquisitions over the past year or so with some funded by equity. That has seen its share count grow from 157 million shares at listing to 191 million shares at the start of this month. It also cuts earnings per share and sinks the share price.
As an example, IPH saw 51% growth in revenues, 53% in underlying earnings and 50% in net profit for FY2016 compared to the previous year, yet underlying earnings per share increased by just 32%.
More falls to come?
IPH has also just completed a share sale facility allowing some holders of escrowed shares to sell their shares at $5.00 per share. More than 30 million shares were sold through the facility.
That could see the share price sink even further today.
A concern for existing shareholders is that if insiders are selling their shares as soon as the escrow period ends and for just $5.00, can investors put any faith in the company's potential growth?
Looking ahead
The latest acquisitions should increase net profit in the FY17 year and beyond, particularly if IPH can realise some synergies, taking out duplicate costs and increase revenues
The company is guiding for earnings before interest, tax, depreciation and amortisation (EBITDA) of between $72 and $74 million for the FY17 year – compared to $65 million underlying EBITDA in FY16, representing growth of around 12%.
At the current price of $5.25, IPH is trading on a trailing P/E of 21.4x earnings, not cheap, particularly with EBITDA growing by just 12%. That compares to intellectual property firm, Xenith IP Group Ltd (ASX: XIP), which is trading on a trailing P/E of 19.1x. Another IP firm, QANTM Intellectual Property Ltd (ASX: QIP), is trading on a prospective P/E of just 16.5x at the current share price of $2.23.
Potential investors might want to wait for a lower price.
