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Why CPI Card Group Stock Dropped 12% Today

By Rich Smith – Sep 15, 2021 at 2:30PM

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CPI is cashing in on an impressive stock price run -- and insiders are cashing out.

What happened

Shares of credit and debit card manufacturer CPI Card Group (PMTS 1.16%) had fallen 12.1% as of 2 p.m. EDT Wednesday afternoon.

The company has only itself to blame.

Big red arrow going down over a stock chart

Image source: Getty Images.

So what

Capitalizing on an impressive run in stock price after earnings last month, CPI filed an S-3 registration statement with the Securities and Exchange Commission today. In it, the company advised that it plans to issue and sell $150 million worth of new common stock at some point in the future. At current share prices, that works out to about 4.3 million new shares -- enough to dilute existing shareholders out of about 28% of their ownership interest in the company.

Simultaneously, CPI informed that its largest shareholders -- two subsidiaries of private equity fund Tricor Pacific Capital Partners -- are registering just under 6.6 million shares, that they currently own, for resale. In total, these shares represent more than a 58% majority ownership interest in the company.  

Now what

What does all of this mean for current investors in CPI (and for potential buyers)? The news here is both good and bad. On the good news front, raising $150 million in cash could permit CPI to pay off nearly half of its $317 million in debt. (And indeed, in its filing, CPI indicated, "we will use the net proceeds from the sale of any shares of common stock offered by us for general corporate purposes, including for the repayment of indebtedness.")

Additionally, the fact that Tricor is looking to exit the stock will mean that CPI will no longer be under the majority control of just one owner, potentially making the company more attractive to more outside investors.

On the other hand, investors today are probably wondering if the reason CPI is raising cash is because its stock, which closed at $38.70 last night -- up 97% from where it traded on earnings day -- has finally peaked and is now doomed to fall. At the very least, the fact that Tricor is exiting CPI suggests that Tricor believes the stock has gone up enough to make now a fine time to exit.

A lot of shareholders today seem to agree.

Rich Smith owns shares of CPI Card Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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