Fools know the value of a stock split: zero. It's a non-event. 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.
Regardless of the reason, though, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.
That's why we pair up stock-split announcements with the sentiments of more than 180,000 members of Motley Fool CAPS. If the best stock pickers think a company's long-term potential is outstanding, and the company is giving off bullish signals, maybe then investors should take notice.
Here are two stocks that recently announced their intention to split their shares.
CAPS Rating (out of 5)
Recent Share Price
Brown-Forman (NYS: BF.B)
Aug. 10, 2012
Under Armour (NYS: UA)
July 9, 2012
Don't blindly buy into a split -- you still need to do some research. Use the announcement as a jumping off point to determine whether its shares are two or three times as good as before.
Absinthe makes the heart grow fonder
The rationale to split the shares of liquor distributor Brown-Forman is one of the reasons Foolish investors would be wise to ignore such announcements. It expresses its "continued confidence in our ability to generate long-term growth in both earnings and cash flow," but certainly it could be just as confident if its shares were $100 as it is if it hacks them to $70. More likely it's looking to overshadow the earnings miss it reported earlier this month as higher taxes and operating expenses caused it to post per share profits of $0.73 compared to analyst consensus estimates of $0.76.
While beer still comprises almost half of all alcohol sales, it's slowing down as wine and other hard drinks grow in popularity. Boston Beer has recognized this, pushing its hard cider and hard teas as its top beer brand Samuel Adams sees sales slip. MillerCoors and Anheuser-Busch InBev both acquired hard cider makers recently, recognizing the trend as well.
Brown-Forman's leading liquor continues to be Jack Daniel's, which saw 12% growth in the quarter and remains the world's top American whiskey. The super-premium category registers sustained strength and has been aided by a good showing from its Finlandia vodka. That category was one of the reasons I thought it was a prime contender for Central European Distribution's (NAS: CEDC) vodka business. Brown-Forman wanted to expand in Eastern Europe, and CED needed to shed some categories. Instead, Russian spirits distributor Russian Standard began increasing its stake.
At 25 times earnings, Brown-Forman is comparably priced to industry leader Diageo (NYS: DEO) , though it trails in estimated earnings growth this year and next. However analysts are looking for B-F to exceed Diageo over the long haul, and CAPS member Buffettinvestor likes the competitive moat its brands provide.
Add the liquor distributor to the Fool's personalized stock tracking service and tell me in the comments section below or on the Brown-Forman CAPS page whether its decision to split its stock makes sense or is management just getting a little tipsy.
A special niche
A couple of months ago, I was concerned that despite Under Armour beating analyst expectations, inventory issues were still piling up and it was carrying a heavy debt load as margins slid, cash balances fell, and full-year guidance was coming in at the low end of forecasts. It rewarded my concern by jumping an additional 10% in value.
Unlike Brown-Forman, management at the athletic apparel maker wants to spread the wealth out over a larger investor base, figuring the lower share price will attract more traders by improving its liquidity.
I remain troubled by the operational issues I raised previously and by the fact that at over 56 times earnings it commands a ridiculous valuation compared to rivals like Nike and even lululemon athletica (NAS: LULU) , which itself carries some lofty prices. To be fair, analysts expect UA to grow earnings at a faster rate than Nike (though not as fast as Lululemon), but that's more than been priced into the stock.
I agree with CAPS member dcrednek, who says "Buy the products, but at this price I'd pass on the stock." I have an underperform rating on Under Armour, but add the clothier to your watchlist, then let us know on the Under Armour CAPS page if you agree the prospects for growth represented in its P/E ratio are looking a little threadbare.
Split the difference
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At the time thisarticle was published 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 Boston Beer, Under Armour, and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Under Armour, Diageo, Nike, lululemon athletica, and Boston Beer. Motley Fool newsletter services have recommended creating a bear put spread position in Under Armour. 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.
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