Investors looking for positive indicators of a stock’s future performance often consider a stock split a good sign. As a technical matter, a stock split changes nothing about a company’s performance or value. True, per share numbers must be adjusted, but the underlying revenues and profits aren’t altered—just the per share statistics. Still, companies often split their shares when their stocks have appreciated to the point where investors may question an investment because of limited capital. So, by splitting the shares, the stock becomes more appealing to a broader group of investors and, it is believed, that pent up demand for what is already a dear stock, based on a relatively high price, will help spur the price higher after the split.
Of course, stock prices don’t always continue to ascend after a stock split. And, there are times when companies with low share prices use reverse stock splits to boost share prices above exchange minimums so that they may remain listed. So, a stock split is not the sole criteria by which a company should be judged. That said, it is an interesting indicator that more research about a company could be worthwhile.
Every week on the back page of the Ratings & Reports section of The Value Line Investment Survey is a list of upcoming stock splits. Two stock with and upcoming splits are Trex Company, Inc. (TREX) and Mueller Industries, Inc. (MLI).
Trex Company, Inc.
Trex Company, Inc. is the world’s largest manufacturer of wood-alternative decking and railing products. The company’s portfolio of products, which are primarily made through a combination of waste wood fibers and reclaimed polyethylene, are marketed under the Trex brand name and are sold in more than 6,700 retail locations. These offerings range across the decking (products include Trex Transcend, Trex Enhance, Trex Select, and Trex Accents); railing (Trex Transcend Railing, Trex Designer Series Railing, Trex Select Railing, and Trex Reveal); porch (Trex Transcend Porch Flooring and Railing System); fencing (Trex Seclusions); trim (TrexTrim); lighting (Trex DeckLighting); and steel deck framing (Trex Elevations) categories.
Trex has increased its market share worldwide by expanding its distribution network, introducing new product lines, and revising its pricing strategy (implemented in 2014). This, combined with a higher average price per unit, led to top- and bottom-line gains in 2013. Management expects to build on this momentum going forward, reflecting stronger demand from both new and existing customers, as well as an improving housing market. First-quarter revenues are pegged to advance around 7% year over year, to roughly $115 million.
Although there is minimal color on the topic, Trex has new commercial products in the works. In fact, the company expects the first line, which was described as a solution for a competitive polyethylene raw material alternative, to be at full production by the third quarter. This will likely be an additional driver of top-line growth.
On February 19, 2014, Trex announced that the Board of Directors approved a two-for-one split of its common stock for shareholders on record at the close of business on April 7, 2014. The stock split, which will be distributed on May 7, 2014, is in the form of a stock dividend. Ronald W. Kaplan, Chairman, President, and CEO, said, “This is the first stock split in Trex’s history and reflects the significant increase in our Company’s stock price in recent years. The split will provide more trading liquidity by appealing to all investor classes and reflects our confidence in our roadmap for the future.” In addition, the company authorized a $50 million stock repurchase program, which will enhance shareholder value and support share-net growth. To wit, the company completed its first buyback program (announced in August) of $25 million during the third quarter.
Mueller Industries, Inc.
Mueller Industries, Inc. is a leading manufacturer of copper, brass, aluminum, and plastic products, with facilities located throughout the United States, Canada, Mexico, Great Britain, and China. The company has two reportable segments: Plumbing & Refrigeration and Original Equipment Manufacturers (OEM).
Plumbing & Refrigeration is composed of Standard Products (manufactures and sells copper tube, copper and plastic fittings, line sets, plastic pipe, and valves in North America); European Operations (makes and markets copper tube to Europe and the Middle East); and Mexican Operations (consists of pipe nipple manufacturing and import distribution businesses, including product lines of malleable iron fittings and other plumbing specialties). The latter, the OEM business, manufactures and sells Industrial Products (IPD) and Engineered Products (EPD), such as brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. Mueller-Xingrong, its Chinese joint venture, is also included in this segment.
The company has struggled to promote top-line growth in this difficult economic environment, with new housing starts and commercial construction directly correlated with the company’s operations. We expect Mueller to progress over time, however, as these economic indicators should continue to show some signs of improvement. Notably, new housing starts have risen to respectable levels, despite losing some momentum of late, and should hold steady going forward. Greg L. Christopher, CEO, stated, "The recovery in the housing market continues to advance but at an uneven pace. Higher mortgage rates in mid-2013 caused turbulence in the market, but for the year as a whole, approximately 923,000 homes and apartments were started, 18 percent more than in 2012. We still have a way to go to reach the housing construction levels of 2007 and before.”
On another note, the company has been active on the acquisition front of late, as it purchased Howell Metal Company and entered into a definitive merger agreement with KME’s Yorkshire Copper Tube business, which should expand its core businesses and help to promote long-term growth.
Recently, the Board of Directors approved a two-for-one stock split of the company’s common shares outstanding, which will be payable in the form of a stock dividend, to stockholders of record on March 14, 2014. Shareholders will receive one additional MLI common share for each common share held. The distribution date is set for March 28, 2014. Simultaneously, the company announced a 20% dividend hike (payable March 14th), bringing the quarterly payout to $0.15 a share.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.