American Dairy shares skid on SEC investigation
Shares of American Dairy, Inc. (NYSE: ADY) are being pummeled to a new 52-week low today after the distributor of milk powder and soybean products in China announced late Tuesday that the Securities and Exchange Commission has launched an informal investigation against the small cap concerning entities and individuals who provided accounting or certain advisory services to the firm.
As a result of the investigation, the San Marino, Calif.-based company has decided to terminate its current public accounting firm Murrell, Hall, McIntosh & Co. American Dairy said it had previously planned to change accounting firms by May 1, 2008, as stipulated within the company’s financing indenture; but has expedited that process due to the SEC investigation.
Shares of American Dairy careened 22.5%, or $4.08, to $14.02 at 12:47 p.m. ET. Shares of American Dairy have been trading in the range of $14.77 to $26 for the past 52 weeks.
“Overhang [on the stock] has already begun,” Susquehanna Financial analyst Hao Hong said in a phone interview today. “People are concerned about the scope of the investigation. I think the overhang can only be cleared up when we can see positive news development.”
Hong says there are three positives going for the company that should alleviate concern, including the termination of what the analyst calls “an incompetent auditor,” a strong fourth quarter ahead and the fact that the stock is now cheaply valued at roughly six to seven times earnings, given that the stock is trading lower on the investigation news.
American Dairy stated that the investigation is not related to its business operations or its management, but instead to the independence of Murrell, Hall, McIntosh and Henny Wee & Co. — two entities that provided accounting and advisory services to American Dairy.
“Expenses will be incurred, but neither the company’s operation, nor its growth will be disrupted. We are setting our eyes on a strong fourth quarter,” Hong wrote. The analyst estimates fees of approximately $1 million associated with a change in accounting firms.
Hong is forecasting revenues of $41.5 million for the fourth quarter, while an analyst polled by Thomson Financial is forecasting revenues of $42.4 million. The company booked $38.19 million in revenue for the fourth quarter of 2006. “China has historically experienced the birth of 16 million newborns a year on average,” Hong said. “This year, was the golden year, in that 20 million to 22 million new babies were born, which represents a volume increase of 20% to 30%. The company is in the sweet spot because babies will start to consume powdered milk and the company should see strength in its volume.”
American Dairy (ADY) said it could potentially restate historical financial performance; however, said that at the current time, it doesn’t anticipate that this will be necessary.
“While we see signs of accounting conservatism in American Dairy’s financial statements, it would be imprudent to conclude the extent of any potential accounting restatements at this early stage,” Hong wrote.
