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Nicklaus: Short-selling sharks circle Amdocs for a second time

Nicklaus: Short-selling sharks circle Amdocs for a second time

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Something about Amdocs, a Chesterfield-based software company that serves the global telecommunications industry, has recently attracted some sharks.

Not the aquatic variety, of course, but the Wall Street equivalent: Short-sellers who sense a weakness and sell borrowed shares, expecting to profit as the price falls.

In January 2019, a firm called Spruce Capital issued a short-sale recommendation on Amdocs, accusing the company of “questionable financials and accounting.” The report briefly knocked Amdocs’ shares down by 9%, but never by the 25% to 50% that Spruce said they deserved to fall. The shares wound up climbing 23% in 2019.

Last week, a firm named Jehoshaphat Research picked up the case against Amdocs. It issued a blistering 69-page report, saying a monthslong investigation had uncovered “wildly overstated profit margins, a balance sheet that is far from the cash-rich fortress it appears to be, and a revolving door of company auditors resigning from their posts in multiple countries.”

This time, the criticism knocked Amdocs’ shares down 12%, erasing $1.2 billion of market value.

The company responded the next day, saying the report contained “inaccurate statements, groundless claims and speculation that were designed to drive the stock price downwards.” Amdocs said it was “fully confident in our accounting and business practices,” and followed up Thursday with a detailed rebuttal of Jehoshaphat’s claims.

At least two stock analysts, meanwhile, don’t see the report as anything to worry about.

William Power, an analyst at Milwaukee-based Baird, issued an April 1 report in which he picks apart one of Jehoshaphat’s main claims, which is that filings by Amdocs subsidiaries show the parent company’s profits to be inflated by between 40% and 50%.

The short-seller looked at only 17 or 18 of Amdocs’ 160 worldwide subsidiaries, Power said. Some of the units have different fiscal years than the parent, and some operate under different accounting standards. Intercompany transactions also obscure the results.

“Trying to reconcile around all these issues, this exercise is flawed,” Power concluded.

He also dismissed another of Jehoshaphat’s findings, which is that audit firms have resigned from a half-dozen Amdocs subsidiaries since 2018. Power says these changes were initiated by Amdocs, which wanted to consolidate the number of firms it relied on for audit services.

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What about the charge that Amdocs is inflating the amount of cash it generates? Jackson Ader, a JPMorgan analyst, doesn’t find this argument persuasive.

Amdocs not only generates cash, it uses it, he said in an April 1 report. In the last three years, the company spent $650 million on acquisitions and $1.6 billion on dividends and share repurchases.

“Unless we are missing something, these do not seem like the actions of a company with a cash availability problem,” Ader wrote.

Ader even believes the short-seller scare has created a buying opportunity. “The report hinges on a couple of items that can be reasonably explained, so we would expect a bounce-back in shares as these explanations are digested,” he wrote.

Overall, Amdocs isn’t a popular target for short-sellers. The short interest in its shares amounts to just 1% of the float, or the number of shares available for trading. The average for large companies is about 3%.

The Chesterfield company, though, operates a global business with a complex structure, and it relies on a steady diet of acquisitions to keep profits growing. That seems to attract the type of sharks who like to stalk their prey in public.

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