MDC Partners stock has dipped to a new yearly low after speculation emerged that the holding company may be under intensified scrutiny from the SEC for financial irregularities. Also, one of the firm’s biggest supporters on Wall Street, Albert Fried & Co's Richard Tullo, is now downgrading the stock.
At the time of this posting, MDC's stock had fallen more than 10% to $8.30. By the end of the trading it rebounded slightly to close down 8.6%. By comparison the Dow was down 0.16%.
In recent weeks, the Securities and Exchange Commission’s (SEC) enforcement division has notified several companies it is investigating their usage of adjusted earnings measures, reports The Wall Street Journal.
Responding to the story, which didn't identify the companies, short seller Daniel Yu, head of Gotham City Research, tweeted that he believes MDC Partners "fits this description" of the firms the SEC contacted.
The SEC launched an investigation into MDC's accounting and trading activity nearly two years ago. In July of 2015, CEO Miles Nadal was forced to resign.
"We maintain our belief — which we articulated earlier this year — that MDC is in serious risk of bankruptcy or having to raise money just to stay in business," Gotham City replied in an email in response to a question about the matter. In April, Gotham City wrote a lengthy and scathing report on the company that asserted the stock was overvalued by 96% and worth less than a dollar per share.
Meanwhile, Tullo downgraded the stock from overweight, based on what he says are concerns over MDC's ability to withstand an advertising recession.
Tullo's report also downgraded several media companies, due to tepid TV ratings. But he says MDC is under "particular vulnerability" because of a weak balance sheet. "
MDC has leverage, and we think the 8% dividend is in question as the roughly $40 million in cash used to pay the dividend does not help MDC's balance sheet which is one critical issue with the shares," he says.
As Omnicom, IPG, and Publicis have posted weak U.S. growth in Q3, MDC, which derives roughly 80% of its revenue in North America, is not in good shape to over-perform versus expectations, says Tullo.
Tullo's broader concern is with the entire advertising industry, which he believes may be headed for a large contraction. "We used to talk about "Seinfeld," today we talk about Twitter and WikiLeaks. Social media has moved to the first screen."
He is hopeful if ratings return 8%-9% after the election that these concerns are a short-term hiccup, but there may be larger, long-term "structural concerns" if ratings increase only 1%-2%.
"I don't think P&G is pulling back advertising just because Trump or Clinton is strong in the polls," adding the whole landscape "is poised to rejigger the market."
Citing its pre-earnings report quiet period (Q3 results are scheduled for release Nov. 3) MDC declined to comment.