As Wirecard stock crashes, analysts finally pull buy ratings
Analysts should always be skeptical and always try to trace the cash flows. It’s very difficult with some companies, but that’s the first red flag.
More than a year after allegations of forgery and fraud at German payments company Wirecard AG, analysts have decided the stock isn’t worth buying — now that it’s lost more than three-quarters of its value in two days.
As of Wednesday, 10 out of 25 analysts tracked by Bloomberg recommended buying the stock, and the group as a whole saw 49-per-cent upside for the shares. Then, Wirecard shocked investors Thursday with the revelation that 1.9 billion euros (C$2.9 billion) of cash was missing, sending the shares plunging. Since then, at least 10 analysts have removed their recommendations and three have downgraded the stock to sell. Societe Generale SA withdrew its buy recommendation on Friday afternoon, a spokesperson said by email.
The episode adds to the decades-long list of cases, stretching from Enron Corp. and Worldcom Inc. to NMC Health Plc, of analysts continuing to recommend high-flying shares even when allegations of questionable accounting have emerged. Analysts have powerful incentives to be optimistic: It ensures they get access to corporate executives, helps their banks win investment-banking business and avoids conflict with their investment-management clients who own the stock.
“The fact that so many analysts were positive for so long is interesting,” said Gavin Launder, a fund manager at Legal & General Investment Management. “I’m not sure how that happened. Convincing management, I guess.”
Questioning Wirecard’s finances was particularly difficult, because the company — and the German regulator — pushed back aggressively. When the Financial Times reported in January 2019 that a senior executive at the payments company was suspected of using forged contracts for several suspicious transactions, the company said the article was “false, inaccurate, misleading and defamatory.” Regulator Bafin said it would look into possible market manipulation, and it temporarily banned bets against the company’s stock.
Wirecard on Thursday said Ernst & Young was unable to confirm the location of 1.9 billion euros of cash in trust accounts, sending the shares down 62 per cent. On Friday, the two Asian banks that were supposed to be holding the money denied any business relationship with the German payments company, prompting a 35-per-cent drop. Chief executive Markus Braun resigned.
“Analysts should always be skeptical and always try to trace the cash flows,” said Launder, who owned shares in Wirecard until January 2017 and sold his holdings because of accounting concerns. “It’s very difficult with some companies, but that’s the first red flag.”
Many analysts stayed optimistic on the stock throughout multiple allegations of wrongdoing last year in the Financial Times, though some started to turn less positive after an inconclusive audit into the payment processor by KPMG. The company was also the target of short sellers in 2008 and 2016, and had repeatedly rejected allegations of accounting irregularities.
“Our analysis and valuation included reservations and was based on the publicly available and audited annual accounts of recent years,” Bankhaus Metzler analyst Holger Schmidt said in a note Thursday. “Yet, this basis for our investment analysis no longer exists or is at least under severe risk to have provided an unrealistic status. Against this background the calculation of a fair value for the shares in order to set a new price target is not possible.” He dropped his buy recommendation on the stock Thursday and now has no rating.
Not all analysts are abandoning coverage on Wirecard entirely. Bryan Garnier downgraded the stock to sell from buy, citing numerous risks including doubts over the company’s revenue, growth and profitability.
“In light of the uncertainties around the authenticity of the financial statements, we are unable to make fair forecasts and therefore put our fair value under review,” analyst David Vignon wrote in a note Friday.