Hydrogen fuel cell company
is recasting financial statements for the past several years due to widespread accounting errors, sparking a big selloff on Wednesday.
Shares of Plug (ticker: PLUG) were down about 11% in early trading to about $ 38 a share. The S&P 500 is down 0.5%. The Dow Jones Industrial Average has risen slightly.
In a statement, the company said the errors were related to complex financial accounting with clients, loss estimates for service contracts and expense classification in its income statement.
Plug was not immediately available to quantify or clarify the reformulations.
Investors hate accounting reformulations. It can undermine trust in any company. All investors have, fundamentally, to value and evaluate companies, numbers are reported.
Cowen’s analyst, Jeffery Osborne, doesn’t seem concerned about the mistakes. It reiterated its Buy rating on Plug’s stock on Monday. “We view weakness as a unique buying opportunity,” Osborne wrote. “While the restatement of results is never positive, the root cause of the restatement has nothing to do with future growth markets, and we note that there was no cash impact.”
Osborne focuses on client contract accounting. Some customers, namely
(AMZN), have warrants to buy Plug shares, a deal that generated negative sales in the fourth quarter. Essentially, the warranties became so valuable that customers received equipment for less than nothing. Cap stock was up nearly 1,000% in 2020, which is why warranties were so valuable.
However, Truist analyst Tristan Richardson downgraded Plug’s stock on Wednesday to Hold from Buy and lowered his target price for the stock to $ 42 from $ 65. “While the company reiterated long-term goals and accounting issues appear transitory in nature, we see limited upside potential until resolution,” the analyst wrote in a report Wednesday.
However, the earnings / collateral issue might not be the main reason stocks are down. Plug is also transferring research and development expenses to cost of goods sold. The total impact on profit margins is nothing, but the change reduces gross profit margins, which is important to investors because gross profit margins are used to get an idea of how profitable a business can be. The company still does not make a profit for the whole year
“In general, it is not that difficult to determine if the costs are above or below the [gross margin] line, so a restatement in such a case is always a bit worrisome, “says accountant Robert Willens. Barron.
Willens has not discussed Plug’s reformulation, but he has discussed many difficult accounting situations. “Since the loss [estimates] are exclusively within the province of the administration, which has the necessary experience to assess the value of service contracts, the fact that KPMG had to step in and question the extent of the company’s accumulated losses is also a bad sign. ” .
For now, investors agree with that sentiment.
Write Al Root at [email protected]