Macro Trouble At Micro Warehouse?

It takes guts to short a stock that has already gone from 54 to 22. But in the case of Micro Warehouse (MWHS), that's what some daring pros have done. They're convinced the stock still has a long way to go--down. Why?

On Sept. 30, the large catalog marketer of microcomputers and software products announced that it has to restate 1994 and 1995 earnings because of "accounting errors." Analysts tracking the company have trimmed earnings estimates for 1996 but have only turned "neutral" on the stock, which dived 5 3/4, to 25 3/4, on the news.

The company admits that the errors could cut results by about $18 million. But the shorts suspect the number will be larger. They think earnings were overstated by inflating the amount of receivables expected from suppliers such as Apple Computer.

"The stock could be in really serious trouble," says Rick Teller of the Teller Group unit of the securities firm Josephtal, Lyon & Ross. "The 1996 and 1997 numbers almost certainly will have to be downsized by a lot more than what analysts have done so far."

Micro, in explaining the numbers, says they principally involved "receivables from suppliers and vendors for defective inventory, stock rotation, and price protection." Teller translates that to mean the company took huge liberties in reporting receivables.

Micro says its audit committee is reviewing the accounts with the help of KPMG Peat Marwick and outside counsel. Management "doesn't expect these matters to affect ongoing operations."

Teller and other investors disagree. They note that the overstatement of earnings by $18 million represents one quarter of total earnings during those two years and more than half of earnings growth. Meanwhile, insiders have sold about $81 million worth of stock over the past two years, notes Teller. Concern that accounting errors may cover more than two years and involve even larger numbers will drive the stock much lower, he suspects. A spokeswoman says a lawsuit filed by shareholders on Oct. 1 prevents Micro from commenting on the matter.

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