A negative report this week by US short seller Spruce Point Capital has caused a steep dropoff in share price for aerospace tech company Maxar Technologies (NYSE, TSX:MAXR).
The best way to avert further damage, says Christine Poole of GlobeInvest Capital Management, is for management to come out and directly respond to the allegations.
Already a poor performer in 2018, MAXR stock dropped a further 13 per cent on Tuesday as investors reacted to the report which claims that Maxar, formerly Macdonald, Dettwiler & Associates, has a 100 per cent downside risk as a result of “financial strains and a brazen accounting scheme to mask failures from its levered acquisitions,” namely, satellite company Space Systems Loral acquired in 2012 and space imagery and remote sensing firm DigitalGlobe acquired in 2017.
Spruce Point charges that Maxar has consistently overstated earnings through “aggressive accounting maneuvers” and that its new CEO, Howard Lance, has been less than forthcoming on his previous leadership roles in two companies that themselves had published misleading financial documents. In effect, the report claims, Maxar has declining organic revenues of negative 12.7 per cent and should be valued at $20 to $25 on an intermediate timeframe, less than half its current value. (All figures in US dollars.)
So far, management has provided a terse response, saying the Spruce Point report is a “direct attempt by a short-seller to profit, at the expense of Maxar shareholders, by manipulating Maxar’s stock price” and that management “continues to be fully committed to transparency in all of its investor presentations and financial reports.”
Probably not good enough, says Poole, CEO and Managing Director at GlobeInvest, who spoke to BNN Bloomberg on Wednesday. “[Ben Axler, Founder of Spruce Point] is saying that there’s a lot of debt and that he doesn’t think the company can pay it back and deliver as quickly as they say. And he had some negative things to say about the new CEO and some accounting issues that he has,” says Poole. “I don’t think the company has come out to address any of this and maybe they should say something,” she argues.
Maxar’s stock had plunged 20 per cent in late February in response to its fiscal fourth quarter and full-year 2017 earnings report, which featured higher revenues related to its DigitalGlobe business but lower revenues from Space Systems to go along with management guidance which estimated a revenue decline of between two and four per cent for the upcoming fiscal year.
“The satellite business for MacDonald-Dettweiler was slowing quite a bit and it looked like it was going to stay soft for a while, so that’s why we got out of the stock [in 2017],” says Poole.
“I can’t comment specifically if there’s any substance behind [the Spruce Point report] but obviously, this hedge fund, I think they’ve done it for a number of years and he’s had some success, so obviously some people are listening,” she said.