As Fools, we know the value of a stock split: zero. It's a nonevent. Instead of a $20 bill in your wallet, you now have 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? A few reasons, really, none of which has anything to do with whether the stock is a good investment. Here are the usual reasons:
- To make it look cheap
- To increase liquidity
- To meet stock-exchange listing requirements
- To express a bullish management sentiment
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 65,000 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 there 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 companies that recently announced stock splits.
|
Company |
Split |
Announcement Date |
Date Payable |
CAPS Rating |
|---|---|---|---|---|
|
Johnson Controls (NYSE:JCI) |
3:1 |
7/25 |
9/14 |
***** |
|
Life Partners Holdings (NASDAQ:LPHI) |
5:4 |
8/9 |
9/14 |
** |
|
Clinical Data (NASDAQ:CLDA) |
3:2 |
9/12 |
9/24 |
** |
|
Paccar (NASDAQ:PCAR) |
3:2 |
9/11 |
9/25 |
**** |
|
Jack in the Box (NYSE:JBX) |
2:1 |
8/7 |
10/2 |
*** |
Source: Company SEC filings. Ratings courtesy of Motley Fool CAPS.
This is a pretty well-thought-of group of companies -- except for Life Partners Holdings and Clinical Data, a developer of genetic tests, which only garner below-average two-star ratings -- with CAPS players as confident about their prospects as management apparently is.
Divided sentiment
Although only a few score investors think Clinical Data will outperform the market, management is undoubtedly banking on the success of the anti-depressant drug it acquired from Merck (NYSE:MRK) a few years back to drive growth. Following positive phase 3 clinical trials, shares of the pharmacogenomics firm soared, and they have doubled over the past 12 months.
That's a different reaction than fast-food chain Jack in the Box got from the market when it reported earnings that handily beat analyst projections last month. There was no pop in its stock, and in fact, the shares trade 27% lower than their recent highs and are at about the same price they were at this time last year. Interesting that the company should consider a split now. Perhaps when it was on the rise earlier this year, there was a rationale for it, but CAPS All-Star EV38 was skeptical even then:
Cmon people, nearly 100% gain in a stock that receives its revenue in junk food (a non-growth industry) in a shaky economy (the U.S.), has poor fundamentals, and junk bond status. Back to the 30's.
Packing in to Paccar
In the case of truck manufacturer Paccar, more than 90% of CAPS investors betting on the company see it beating the market. Perhaps with good reason, too. At Paccar -- a Motley Fool Stock Advisor recommendation -- truck sales swelled a year ago, as buyers rushed to place orders before new clean-air regulations took effect. That affected revenue this year, but with trucking still the primary way of getting products from here to there, the American Trucking Association expects the total tonnage share for all trucking to rise to 69.2% in 2011.
That's the kind of scenario that has led CAPS player clintpolley to put Paccar on his bull list.
My brother works at Paccar and we are still in the post-sales blowout we had last year before the "older" model trucks could be sold without all the restrictions of the new ones. Anybody that was going to buy a truck in the next year or so bought one, which is why the numbers were great last year. This year the sales are slow because the buyer base has not built back up yet. At least that's what I hear from the street and all the Peterbilt guys at church. Sales should pick up within the next 6 months or so.
The top bull pitch, however, was penned by StockSpreadsheet, who sees it more simply: Paccar's financials look great, which should lead to explosive growth:
Average annual sales growth of 21% over last 5 years. Average annual EPS growth of 26% over last two years, which is slower than the growth of the previous 3 years, so this is a fast-growing company in both sales and earnings. The pretax profit margin has increased in each of the last 5 years, as has the EPS/book value. The debt-to-equity ratio has had some fairly wide swings over the last 5 years, averaging about 42% during that time frame. The current P/E ratio is above its 5-year trailing average and exceeds the highs of the last two years, so this is bad as it could put downward pressure on the stock. The payout ratio is a reasonable 46%, so the dividend, currently yielding about [1.2%], should be secure. I think this stock could hit $210.00 in five years, or about 2 1/2 times its current value ... Add in the decent [1.2%] yield and I think this stock is a buy.
Split
the difference
How about you? Think Paccar will roll on? Will Clinical Data stick it to the naysayers? Get in the mix with Motley Fool CAPS and share with tens of thousands of your fellow investors how you feel about these stock split stories.
