There's little question that Celsius Holdings (CELH 2.12%) has become a force to be reckoned with in the health-centric energy drink space. While the company has been around since 2006, its transformation began in earnest roughly five years ago when John Fieldly took the helm as CEO. His focus on healthier alternatives paved the road for the company's current success, and he was subsequently named 2022 Executive of the Year by the beverage industry.
Since then, the company's robust business performance has resulted in a surging stock price. Celsius shares have climbed 102% over the past year, and they've gained a mind-boggling 4,300% and 47,100% over the preceding five-year and 10-year periods, respectively.
On Thursday, Celsius announced a forward stock split for the first time in its history. This revelation is causing investors to take a fresh look at the energy drink leader and its stock. Let's recap just how a stock split works and what it means for investors.
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The particulars
In a press release from late Thursday, Celsius announced that its board of directors had approved a 3-for-1 stock split. This will cause an amendment to the company's Articles of Incorporation, resulting in an increase of the total number of authorized shares from 100 million to 300 million.
Following this split, shareholders of record as of Nov. 13, 2023, will receive two additional shares of stock for each share they own. The stock is expected to begin trading on a split-adjusted basis on Nov. 15.
Celsius investors won't need to do anything in order to receive the additional shares. Historically, brokerages take care of everything behind the scenes, and the additional shares will simply show up in shareholders' accounts.
However, it's important to note that the newly issued shares may not show up immediately on Nov. 15. The schedule can vary slightly from brokerage to brokerage, and it can take anywhere from several hours to several days for the additional shares to be added to investment accounts.
Looking at the numbers, for each share of Celsius stock a shareholder owns -- currently trading for roughly $174 per share -- post-split, investors will hold three shares worth about $58 each.
What's the reason for a stock split?
From a purely mathematical standpoint, and as the above figures illustrate, the total value of the shares held by each investor remains the same. One share of Celsius stock currently fetching $174 will be worth the same amount as three post-split shares priced at $58 (3 x $58 = $174). To use the pizza analogy, it doesn't matter if the pie is sliced into eight slices or 16 slices, the size of the underlying pie is unchanged. Similarly, Celsius investors will simply have a greater number of lower-priced shares. So why bother with a stock split?
There's a school of thought that points to investor psychology and how the lower share price can ultimately increase demand for shares once they split. For example, while everyday investors and potential shareholders with limited funds might be reluctant to shell out $174 for a single share, they might be much more willing to buy shares at closer to $60. History reveals, however, that the long-term trajectory of the stock price is ultimately dictated by a company's operational and financial performance.
With that context, Celsius has consistently delivered impressive business and financial results too, which suggests investors might want to take a fresh look.
Does that mean Celsius Holdings stock is a buy?
Investors shouldn't buy Celsius stock just because the company has announced a stock split, but there are other more compelling reasons to consider an investment in the energy drink maker. A review of the company's latest financial report helps support the case.
During the first half of 2023, Celsius generated revenue of $586 million, up 104% year over year. At the same time, diluted earnings per share of $0.92 soared a whopping 360%. That performance wasn't a one-off, either. In 2022, Celsius delivered full-year revenue growth of 108% and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that increased 111%.
These results came despite the company investing heavily in its expansion and the overhang of economic uncertainty, which shows that people are still willing to shell out for their favorite energy drink.
One of the biggest potential growth drivers is a long-term distribution agreement Celsius reached with PepsiCo (PEP -0.62%) late last year. The beverage and snack giant made a $550 million investment in Celsius, amounting to an 8.5% stake in the company. The agreement not only increases the number of retail locations that carry Celsius products but also results in better shelf space.
To be clear, Celsius Holdings isn't cheap. That's primarily the result of the soaring stock price that instigated the split, not to mention the 8% one-day gain following the stock-split announcement. It's currently selling for 11 times forward sales estimates and 94 times forward earnings, which is likely high enough to make any value investors run for cover.
I would argue that given the company's impressive track record, Celsius is deserving of a premium. That said, investors should size their position accordingly and be prepared for the potential of some gut-wrenching volatility over the short term, despite the obvious opportunity and stellar performance.
