Shares of Mohawk Industries (MHK) are under pressure on Thursday after a shareholder lawsuit recently added new court filings that allege multiple issues inside the company. Not expressing an opinion on the validity of the allegations against the company, Wells Fargo analyst Truman Patterson acknowledged that they would "clearly" be a negative if proven to be true, likely damaging shareholder confidence in management. Voicing a similar opinion, his peer at JPMorgan added that the lawsuit will likely remain an overhang on the stock until the matter concludes.

'CLEARLY' A NEGATIVE IF PROVEN TRUE: In a research note to investors, Wells Fargo analyst Truman Patterson highlighted that the Public Employees' Retirement System of Mississippi has filed a class action complaint against Mohawk and CEO Jeff Lorberbaum, claiming the company engaged in a "fraudulent scheme to fabricate revenues through fictitious 'sales' of products that were not delivered to customers and to conceal from investors the true reasons for the company's ballooning inventory," damaging shareholders between April 2017 and July 2019. While Mohawk stakeholders have known about the lawsuit since early January, filings have only recently become publicly available, which the analyst believes drove shares down on Wednesday. Patterson expressed no opinion on the validity of the allegations against the company but acknowledged that they would clearly be a negative if proven to be true, likely damaging shareholder confidence in management. The analyst has an Underweight rating and an $80 price target on the stock.

After the Public Employees' Retirement System of Mississippi gave "significant incremental details" regarding claims that Mohawk engaged in channel stuffing at the end of the quarter and intentionally overproduced product, JPMorgan analyst Michael Rehaut noted that he sees the "fairly granular level of detail across the allegations" and quotes from interviews with several former employees creating a higher level of risk for the company. While "the veracity of these accusations will likely not be determined until after an extended legal process" of several months if not longer, Rehaut believes the lawsuit will likely remain an overhang on the stock until the matter concludes. The analyst kept a Neutral rating on Mohawk shares.

While Deutsche Bank analyst Seldon Clarke said he "would generally avoid commenting on legal matters," he believes it is important that investors be aware of the potential risks stemming from allegations of accounting fraud made against Mohawk in a complaint originally filed in January of this year. While the filing of the lawsuit was made previously, the recent new filing is "significantly more detailed" and includes testimony from a previous Logistics Business Analyst at Mohawk who claims that alleged inventory stuffing continued into 2020, according to Clarke, who kept a Sell rating on Mohawk shares.

QUIET PERIOD HAMPERS RESPONSE: Commenting on the recently added new court filings that allege multiple issues inside Mohawk, SunTrust analyst Keith Hughes told investors that the most damaging allegation is its revenue recognition practices, which included shipping goods on the last day of the quarter and then having those as returns in the following quarter. The allegations being made during the company's quiet period "have hamstrung any response," added Hughes, who admitted, "it is hard to say as an outsider whether these have merit at this point." However, the analyst argued that given the size of Mohawk, it would need "widespread practices to boost revenues via the method" alleged. The question now shifts to whether the allegations will result in a full SEC investigation, Hughes writes. The analyst keeps a Buy rating and a $119 price target on the shares.

NO COMMENT: Shailesh Bettadapur, a treasurer at Mohawk Industries, told Bloomberg, "As a rule, we do not comment on pending litigation, and don't have a comment now." 

PRICE ACTION: In late morning trading, shares of Mohawk have dropped almost 24% to $69.67, worsening the decline that began yesterday.