Fools 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. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap
- To increase liquidity
- To meet stock-exchange listing requirements
- To express a bullish management sentiment
Sometimes, though, and usually for reasons not so good, companies effect a reverse stock split, reducing the number of shares outstanding and boosting the value of those that remain. Companies in financial trouble or needing to regain stock exchange compliance (or both!) effect reverse splits.
A split decision
Sneaker maker Nike
The CFO says Nike has the flexibility now to split the stock, though he was noncommittal about whether or when the company would actually go through with it. It has in place a plan to repurchase $8 billion worth of stock over the next four years.
Earlier this summer, rival Under Armour
Big game hunter
The athletic gear maker is facing higher input costs for its apparel that led to gross margins contracting 80 basis points in the quarter. It also saw SG&A expenses jump as the Olympics and European football title games caused a 29% spike in "demand creation" costs, otherwise known as advertising. In fiscal 2012 it saw an 11% jump in such costs as it was pushing its NFL uniform initiative, so that suggests we should expect them to return to a normalized level fairly quickly.
With heavy expansion into emerging markets, it looks like the sportswear company is tilting the field in its favor. In local currency, emerging markets were some of the best-performing markets Nike had, with footwear and apparel growing 20% or better. Only the North American markets had a better overall performance, with total division revenues jumping 23%. Even in financially troubled Western Europe, Nike experienced a 6% increase in revenues, though the weakness of the market was apparent.
Surprisingly (or maybe not), China was the trouble spot, with growth slowing as future orders contracted 6% compared to a 1.2% estimated gain. While economists were hoping for a soft economic landing, Nike's results indicate the runway is pocked full of holes.
While Under Armour had the same problems with input costs, it doesn't have the same exposure to international markets and so the relative strength of North American economies worked to its benefit. It's the same refrain with lululemon athletica
According to the analysts at Transparency Market Research, the overall global footwear market will grow at a rather steady pace of just 1.9% through 2018, with athletic footwear coming in slightly below that at 1.8%. Nonathletic shoes, such as those sold by Brown Shoe
Yet I think Nike still has a chance to reap the biggest benefits because the Asia-Pacific region is expected to maintain its predominance, with more than 30% of the market share in 2018. Being one of the premier shoe companies along with Adidas to have a presence there, it will be a growth sector for it despite China's current weakness.
Price is what you pay
At 16 times earnings estimates it might look cheap, compared with Under Armour at 36 times estimates or Lululemon at 33, but Nike's enterprise value trades for more than 32 times its free cash flow as reported in the year-end numbers, so it's not exactly a bargain stock. Yet should Nike effect that stock split, that probably wouldn't stop people from buying in as it looks cheaper.
Even so, I marked the shoemaker to outperform the broad market averages on Motley Fool CAPS earlier this year when it was trading north of $100 a share, and I think it will return to those levels again -- at least until management splits its stock. But you can let me know in the comments section below whether you agree that Nike can continue outrunning the competition.
Split the difference
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Fool contributor Rich Duprey owns shares of Nike, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of Under Armour, Nike, Deckers Outdoor, and lululemon athletica. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.