Beaten-down defense and space industry components maker Karman (NYSE: KRMN) can’t seem to catch a break. The company has suffered a string of setbacks, and this week it had to endure a new indignity: a short-seller’s report.
With that squawking albatross at its back, Karman’s shares were dropping by 11% week to date as of late Friday night, according to data compiled by S&P Global Market Intelligence.
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Short fuse
That short-seller, J Capital, made the case for shorting Karman in a post on its Substack publication “The Equity Dispatch.”
J Capital has several issues with the way the company is being managed. It pointed out that Karman’s active and busy acquisition policy gave it assets that the company often disclosed as “not material” to its operations. This, despite notably high prices.
“Ongoing weak internal controls at Karman, given difficult accounting challenges for defense products, increase our concern,” J Capital wrote in the post. “If we were investors, we would want to make sure acquisitions and contract payments had been audited with strong internal controls.”
The firm also feels that the stock’s valuations are worryingly high. It wrote that the company’s ratio of anticipated full-year enterprise value (EV) to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is around 28; this is around a 70% premium to S&P 500 index component stocks, and a 50% premium to the aerospace and defense industry.
Karman hasn’t yet formally responded to J Capital’s report.
The wrong kind of streak
Karman is a relatively new arrival to the stock exchange, and it’s already had its share of negative news; last week, for example, its shares slumped on a planned CFO succession.
We should always take the criticism of a short-seller with at least a small grain of salt, as it has a material interest in the target stock falling further. But this one raises some real questions for Karman, and the company would do well to provide some answers.
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