Harvey Norman Holdings Ltd [ASX:HVN] has run into a spot of trouble lately. The stock is down 15.37% year-to-date. In the last five days, the retailer shed more than 8% off its share price, trading around $4.28.
Why has HVN declined?
The company’s first-half results were solid. HVN reported revenues of $976 million, up 7.1% on FY16 figures. Net profit lifted 39.1%, to $257 million, which increased shareholders’ earnings per share 38.5%, to 23.13 cents.
These figures alone show the company to be in good stead.
But, short sellers haven’t been fazed by HVN’s great financials.
The reason why might be is because HVN’s financials are not a true representation of the company. According to some fund managers and corporate governance firms, HVN isn’t transparent when reporting financials.
Reported by the Australian Financial Review:
‘It is understood ASIC launched an inquiry in the aftermath of the Harvey Norman annual meeting in November, after governance group Ownership Matters released a report urging fund managers to vote against the accounts because of a lack of transparency, and questioned whether franchises which are closely controlled by the group should be consolidated.
‘In December, ASIC Commissioner John Price said the regulator was focusing on asset values and accounting policy choices.
‘“ASIC continues to see companies use unrealistic assumptions in testing the value of assets or that have applied inappropriate approaches in areas such as revenue recognition,” Mr Price said.’
Is HVN a buy?
Greg Harvey has taken the opportunity to buy more HVN stock while the price has been depressed. While you might want to do the same, I believe it would be best to wait until ASIC finishes their investigation.
The reason why is because you want to be sure you’re investing in companies with long-term growth potential. And right now, there is uncertainty surrounding HVN’s current financials.
HVN’s situation should be a reminder that management, and the reliability of financial reports, is very important when considering a stock investment.
Many times, analysts will skip over the quality of management. It’s as if the company deploys capital and runs the show all by itself.
It is management that runs the daily operations of the business. If management is not competent or misleads shareholders, unknowingly or knowingly, it should impact your overall view of the company.
Junior Analyst, Money Morning
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