Shares of SunPower (SPWRA) are suffering on Tuesday morning as they disclosed a review of “unsubstantiated accounting entries.” Of course, the stock is down nearly 18% just after the open on Tuesday as many investors are headed for the exits. We cannot blame those investors for dumping shares right now because any time accounting principles are questioned it can be very hard to regain lost credibility. Financial markets rely on the integrity of financial data, and any accounting crisis inherently brings a lot of uncertainty. Most investors will automatically assume the worst and past experiences with the likes of Enron and Worldcom have show the need for caution.
According to SunPower, the issues were identified in an internal investigation of their Philippines manufacturing unit. There are issues in their accounting for cost of goods sold and and which years these costs should be counted towards. It is believed that cost of goods sold were overstated by $1 million in 1Q of this year, but were understated by $14 million in 2Q and $2 million in the third. The results for the last two years will likely need to be amended once the investigation is complete. Furthermore, the guidance for the year ahead cannot be relied upon as it is subject to change as well. If there is one thing we know, it is that the market hates uncertainty. Analysts have downgraded from bullish ratings at Piper Jaffray (PJC) and FBR this morning, and more may be on the way.
At Ockham, we do not think that the errors in the low tens of millions over the course of a few quarters are a huge concern as far as we can tell. That being said, there is no excuse for accounting mistakes and it calls into question the company’s recent performance. So, even though we have our most bullish Greatly Undervalued valuation stance on SPWRA, we would wait for more clarity on the situation, which the company hopes to bring to the market in the next 30 days. As we always say, valuations cannot be looked at in a vacuum and should be only one factor in stock selection. Accounting issues will always spook investors even if the amount involved seems insignificant.