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Plug Power develops hydrogen fuel cell systems.
Toru Hanai / Bloomberg
Hydrogen fuel cell company
Plug Power
is restating the financial statements for the past few years because of widespread accounting errors, prompting a major liquidation on Wednesday.
Plug shares (ticker: PLUG) fell about 11% at the start of the trading session, to around $ 38. The S&P 500 fell about 0.5%. The Dow Jones Industrial Average is slightly up.
In a note, the company said that the errors are related to complex accounting of financing with customers, estimates of losses in service contracts and classification of expenses in its income statement.
Plug was not immediately available to quantify or clarify the reformulations.
Investors hate accounting reformulations. This can undermine confidence in any company. All investors have, essentially, to value and evaluate companies, these are reported numbers.
Cowen analyst Jeffery Osborne does not seem concerned about the mistakes. He reiterated his purchase rating on Plug’s inventory on Monday. “We see weakness as a unique buying opportunity,” wrote Osborne. “Although the reformulation of results is never positive, the root cause of the reformulation has nothing to do with the future growth of the markets and we note that there was no impact on cash.”
Osborne is focused on client contract accounting. Some customers, namely
Walmart
(WMT) and
Amazon.com
(AMZN), has guarantees to buy shares in Plug, an agreement that generated negative sales in the fourth quarter. Essentially, warranties have become so valuable that customers receive equipment for less than nothing. The stock of plugs increased by almost 1,000% in 2020, which is why warrants were so valuable.
Truist analyst Tristan Richardson, however, downgraded Plug’s shares on Wednesday to Hold de Buy, and cut its target price to $ 42 from $ 65. “Although the company reiterated long-term goals and accounting issues appear to be of a transitory nature, we see a limited positive side until the resolution, ”wrote the analyst in a report on Wednesday.
The issuance of revenue / guarantee, however, may not be the main reason for the stock’s fall. Plug is also shifting research and development expenses to the cost of products sold. The total impact on profit margins is nothing, but the change reduces gross profit margins, which is important for investors because gross profit margins are used to get a sense of how profitable a business can be. The company still does not make profits for the whole year.
“It is usually not that difficult to determine whether the costs are above or below the [gross margin] line, so a reaffirmation in such a case is always a little worrying, ”said accounting expert Robert Willens Barron’s.
Willens did not look at the reformulation of the Plug, but he did look at many difficult accounting situations. “Since the loss [estimates] they are exclusively within the management province, which has the necessary experience to assess the value of service contracts, the fact that KPMG had to intervene and question the extent of the company’s loss accumulations is also a bad sign. ”
For now, the investor agrees with this sentiment.
Write to Al Root at [email protected]