The stock of plugged-in energy falls into widespread accounting errors. What you need to know.

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Hydrogen battery company

Power plug

reissues the financial statements of recent years due to widespread accounting errors, which has led to a large liquidation on Wednesday.

Plug shares (ticker: PLUG) have fallen about 11% during the first operation to about $ 38 per share. The S&P 500 is down about 0.5%. The Dow Jones industrial average is up slightly.

In a statement, the company said the errors were related to the complex financing accounting with customers, estimates of losses from service contracts and the classification of expenses in the income statement.

The plugin was not immediately available to quantify or clarify reformulations.

Investors hate accounting reformulations. It can undermine trust in any company. All investors must essentially value and evaluate companies.

Cowen analyst Jeffery Osborne doesn’t seem worried about mistakes. He reiterated on Monday his purchase score on Plug shares. “We see weakness as a unique buying opportunity,” Osborne wrote. “While the reformulation of results is never positive, the root cause of the reformulation has nothing to do with future growth markets and we note that there was no cash impact.”

Osborne focuses on customer contract accounting. Some customers, namely

Walmart

(WMT) i

Amazon.com

(AMZN), have guarantees to buy Plug shares, a deal that sparked negative sales in the fourth quarter. Essentially, the warranties were so valuable that customers received equipment for less than nothing. Stocks of connectors increased by almost 1,000% in 2020, which is why guarantees were so valuable.

However, Truist analyst Tristan Richardson lowered Plug shares on Wednesday to hold them from Buy, and reduced their target share price to $ 42 from $ 65. “While the company reiterated long-term goals and accounting problems appear to be transitory in nature, we see a limited rise to resolution,” the analyst wrote in a report on Wednesday.

However, the issuance of income / guarantees may not be the main reason why the shares are reduced. Plug also transfers expenses from research and development to the cost of goods sold. The total impact on profit margins is nothing, but the change reduces gross profit margins, which is important for investors, as gross profit margins are used to get an idea of ​​how profitable it can be. business. The company is not yet making full year profits.

“It is usually not so difficult to determine whether the costs belong above or below the [gross margin] line, so a rewording in this case is always a bit worrisome, ”explains accounting expert Robert Willens De Barron.

Willens has not analyzed Plug’s reformulation, but he has analyzed many difficult accounting situations. “Since the loss [estimates] are exclusively in the management province, which has the necessary experience to assess the value of service contracts, the fact that KPMG should intervene and question the scope of the company’s accumulations of losses is also a bad sign “.

For now, investors agree with this sentiment.

Write to Al Root at [email protected]