As Fools, we know the value of a stock split: zero. It's a nonevent. Instead of a $20 bill in your wallet, you've now got two $10 bills. You're eating 12 smaller slices of your pizza instead of six larger ones.
So if stock splits mean nothing, why do companies do them? There are a few reasons, really, none of which has anything to do with whether the stock is a good investment. Here are the usual reasons:
Regardless of the reason, the market tends to view stock splits as positive events, and a company's shares can get a short-term boost from the news. If the business isn't a good, long-term company, it doesn't matter if its shares split, or whether you buy them before or after.
A split decision
That's why we pair up stock-split announcements with the sentiments of the 60,000 investors at Motley Fool CAPS. Every day, professional and novice investors rate the prospects of thousands of stocks, resulting in a rating between one and five stars (five being the best). If the best stock-pickers think a company's long-term performance is outstanding and the company has announced the bullish signal to split its shares, maybe investors should take notice.
Then we dive in and see what exactly the CAPS community has to say about some of these companies. Here is a list of stocks that have recently announced stock splits.
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Company
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Split
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Announcement Date
|
Date Payable
|
CAPS Rating (out of 5)
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Nvidia (:NVDA)
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3:2
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8/9/2007
|
9/10/2007
|
*****
|
|
National Oilwell Varco (:NOV)
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2:1
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8/22/2007
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9/28/2007
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*****
|
|
Parker Hannifin (NYSE:PH)
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3:2
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8/16/2007
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10/1/2007
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*****
|
|
Blue Coat Systems (NASDAQ:BCSI)
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2:1
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8/22/2007
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10/2/2007
|
***
|
|
Deere & Co. (NYSE:DE)
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2:1
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8/29/2007
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11/1/2007
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****
|
Sources: Company filings, Motley Fool CAPS
This is a highly rated group of companies on CAPS (with the exception of Blue Coat Systems, which only garners an average three-star rating). CAPS players seem as confident about their prospects as management apparently is.
No sugar-coating Blue Coat
Although more than 250 investors think network optimization solutions provider Blue Coat will outperform the market, the 10% of CAPS investors who don't agree primarily have valuation concerns. All-Star dwot, whose player rating is 99.95% better than that of all other CAPS investors, felt as far back as June that the sky-high P/E is out of line for the performance the company has actually achieved.
PE has gotten out of line ... 20% of their "earnings" is from interest on the money they have in the bank. They also have a lot of share dilution, 14.8 million is what the P/E is calculated on and they have more like 18.6 million shares. To me that means the real P/E from earnings is over 100.
The company looks great, but actually earnings growth from business activities needs to increase about 5 fold to justify the price of this stock.
It seems everyone in the network optimization space has rich valuations. Yet with analysts forecasting a possible slowdown in IT spending, maybe the bears have this one right.
Enforcing Nvidia's GeForce
In the case of Nvidia, we have 95% of all CAPS investors betting on the company beating the market. With good reason, too. Nvidia, a Motley Fool Stock Advisor selection, makes the GeForce and other graphic chips that power video game consoles, computers, cell phones, and PDAs. Top-ranked alzbeta has noted the chips will become more important as gaming grows, creating a fundamentally sound company.
NVDA makes good graphics chipsets. Since gaming and portable devices are gaining popularity, this portion of the business should grow. As Vista is implemented on more computers, the need for high-end graphics should increase. The cash flow has improved, even as sales volume has decreased, which speaks well for the management. They are buying back stock, which should increase share price on the remaining float.
Despite tough competition from Advanced Micro Devices (NYSE: AMD ) subsidiary ATI Technologies, that's a view endorsed by Killim1, who likes what the financials tell him.
NVDA dominates the market as the only independent Graphic Processing Units (GPUs) maker. The balance sheet looks strong having no long term or short/current long term debt. It currently has $2.7b in assets, $668m in liabilities, ROE 29.38%, ROA 22%, net profit margin 16.53%. The real eye opener is quarterly net income growth is up 50%+ every quarter over the last three years with the last quarter just over 99% higher than the previous years quarter. Quarterly sales are up 36% over last year. According to Zack's the EPS is predicted to rise by 21% over the next three to five years.
Split the difference
How about you? Is Nvidia up to speed? Will Blue Coat investors turn blue? Get in the mix with Motley Fool CAPS and tell tens of thousands of your fellow investors how you feel about these stock-split stories.
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