Shares of Mohawk Industries (MHK 4.61%) fell more than 20.43% as of 11:30 a.m. on Thursday morning as Wall Street analysts weigh in on allegations of fraud at the carpeting and flooring manufacturer. The analysts are not taking the charges lightly and are advising investors to do the same.
In January, the Public Employees' Retirement System of Mississippi filed a lawsuit claiming accounting fraud at Mohawk. The suit did not get a lot of attention at the time, but new filings submitted in late June add significant details about the allegations and have gotten Wall Street's attention.
According to analysts, the filing includes testimony from a former Mohawk employee who claims the company has used fictitious sales to artificially boost revenue since 2017.
We don't yet know if those allegations are true, but they are worth noting. Deutsche Bank analyst Seldon Clarke in a note said that, if nothing else, investors should be aware of the suit; in addition, Wells Fargo analyst Truman Patterson wrote that, if the charges are true, they would likely undermine shareholder confidence in management.
Investors are in no mood to wait around and find out what is going on, selling out of the stock on Thursday morning.
Mohawk is in a tough position even without the allegations. The company's shares are off more than 40% year to date on concerns that the COVID-19 pandemic would reduce demand for renovation work and in turn eat into demand for flooring products. Flooring is thought to be more of a discretionary purchase than other segments of the construction market and, therefore, can be more vulnerable to an economic downturn.
The shares had been gaining ground prior to the litigation news on some analyst commentary that sales seem to be holding up better than feared despite the pandemic. Now with questions hovering about the validity of that optimistic data, there isn't a lot of reason to get excited about buying into Mohawk.