Earnings at Canadian plant may have been overstated by up to $18-million from 2005 to 2012
TORONTO—Shares of auto parts maker Martinrea International Inc. tumbled 20 per cent as market players reacted to the company’s warning that it will likely fall short of its financial guidance.
“We believe that Martinrea will be valued at a discount to the other Canadian auto parts companies,” BMO Capital Markets analyst Peter Sklar wrote in a note to clients.
Sklar downgraded Martinrea’s stock to “underperform” from “market perform” and cut his price target on the stock to $9 from $12.50.
The stock was down 20 per cent or $1.92 at $7.50 late Dec. 19, with more than five million shares traded, making Martinrea the most active issue on the Toronto Stock Exchange.
Last month, the company said it expected to earn a profit in the range of 23 cents to 28 cents per share.
Martinrea did not say what it now expects to earn for the quarter but said it will likely be lower than that.
The company said Dec. 18 after markets closed that problems at its Hopkinsville factory in Kentucky, including equipment failures, have meant increased costs and could result in a write down of assets at the plant.
In addition, the company warned that one of its Canadian factories has been overstating its financial results for several years.
The company said a review was ongoing, but estimated its earnings may have been overstated by a total of $10- to $18-million during 2005 to 2012.
Martinrea also said some of the legal costs related to a lawsuit filed against the company by Nat Rea, a former executive and major shareholder in the company, are not covered by insurance and were not included in the guidance.
Rea filed a lawsuit in September accused directors and senior executives at the company of breaching their fiduciary duties to in connection with a series of related party transactions involving certain suppliers and customers.
The allegations have not been proven in court.
Martinrea, which said the claims are without merit, said a special committee of independent directors Scott Balfour and Fred Olson has been assigned to oversee the case.
The special committee is authorized to supervise the investigation of the allegations and make recommendations to the board as to any required steps.
Rea parted ways with the company earlier this year when he stepped down as vice-chairman and a director of the company.
As part of a separation agreement, he was paid $5.2-million.
Martinrea said Rea first raised concerns with the company in 2011 while he was still an executive and director.
The company said the issues were reviewed by the head of the audit committee, who presented his findings to the board.
At the time, Martinrea said Rea “indicated in writing that all his concerns had been addressed” and the board determined no further action was required.
“After consecutive record quarters from a financial and performance perspective, we are dealing with some legal and operational issues,” Martinrea executive chairman Rob Wildeboer said in a statement.
“We have faced many challenges over the years as we grew this company from scratch, and have always met every challenge head on with conviction and a desire to do the right thing for all our stakeholders.”
Sklar noted the problems at Hopkinsville follow problems at Martinrea’s operations in Shelbyville, Ky., last year.
“Our concern is that there may be a pattern of operational issues and equipment failures out of the norm,” he wrote in a note to clients.
Sklar also raised concerns that the costs related to the Rea lawsuit are likely to continue for some time.
“As we have indicated previously, in respect of the litigation initiated by Nat Rea, we are unable to assess the relative merits of each party’s assertions; and, we believe there may be a considerable period of time until these allegations are resolved,” he wrote.
“In the interim, we believe the uncertainty will weigh on Martinrea’s valuation, and we note that the public release of legal documents pertaining to the case can result in a significant amount of volatility in the stock price.”