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Stock Screen: Upcoming Stock Splits - June 12, 2013
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. Some upcoming stock splits to consider are: Flowers Foods, Inc. (FLO), Flowserve Corporation (FLS), and Six Flags Entertainment Corp. (SIX)
Flowers Foods, Inc.
Flowers Foods produces, markets, and distributes a wide array of packaged baked goods throughout the United States. Some of its popular brands include Nature’s Own, Bluebird, and Cobblestone Mill. The company operates two divisions: Flowers Bakeries, which mass produces baked goods via the operations of 30 bakeries, and Flowers Foods Specialty Group, which manufactures snack cakes and frozen breads.
The company is seeking to capture greater market share through fervent acquisition activities. It purchased several baked-goods companies last year, such as Lepage Bakeries, for $370 million. Most recently, it made moves to acquire certain assets from the now bankrupt Hostess Brands, such as the popular Wonder and Butternut bread products, for an estimated $360 million. Food consolidation is fast becoming a lucrative growth catalyst for many in the industry as it affords better bargaining and pricing power. That said, we also expect the company to continue expanding through organic innovation.
The stock price has increased at a slow but steady pace over the past six months. Still, Flowers’ shares are currently trading close to our 3- to 5-year Target Price Range. Thus, value investors may find better opportunities elsewhere.
Management has decided to implement a 3 for 2 stock split on June 19, 2013. Stockholders that were on record at the close of business on June 5, 2013, will receive three stocks for every two held prior to June 5, 2013.
Flowserve corp. designs, manufactures, and markets fluid-handling equipment such as pumps and valves mainly for industries that handle corrosive fluids. The company has three operating segments: Engineered Products (50% of 2012 sales), Flow Control (31%), and Industrial Products (19%). The oil and gas industries accounted for the majority of 2012 bookings (41%).
Demand for the majority of Flowserve’s markets has been muted, of late. Fears of a possible slowdown in China along with delays in larger-scale projects have threatened to lessen the company’s near-term profitability.
Despite macroeconomic pressures, management seems to remain committed to returning capital to investors. The company intends to return around 40% to 50% of net income to FLS shareholders. It has done so in the recent past through a 17% dividend hike as well as through the allocation of an extra $750 million to an ongoing share-repurchase program.
The stock price has continued to soar over the past few months and is currently close to its 52-week high. Part of the stock-price ascension can be attributed to strong first-quarter results. Still, these shares are already trading within our 2016-2018 Target Price Range and, thus, offer limited total returns to shareholders over the longer term.
The company is scheduled to affect a 3 for 1 stock split on June 21, 2013. On that date, all shareholders on record as of June 7, will receive two additional shares for each one held.
Six Flags Entertainment Corp.
Six Flags is the largest theme park operator in the world. The parks offer around 800 rides. The company owns and operates a total of 18 parks, 16 of which are located in the United States, one in Mexico, and one in Montreal Canada. It holds long-term licenses for certain Warner Bros. and DC Comics characters such as Bugs Bunny, Batman, and Superman. Visitors frequent the park on a seasonal basis and about 80% of revenues are derived during the second and third calendar quarters.
The company has made certain attempts to spur revenues in the recent past. More pricing options and seasonal passes have already increased revenues 32% during the 2013 first quarter versus a year ago. Judging from the fact that season pass holders accounted for roughly 45% of last year’s top line, increased marketing and promotional practices should enhance that percentage this year.
Six Flags will likely continue to capture market share in 2013. Our single-digit top-line growth estimate for 2013 ought to be attainable due to new rides as well as the aforementioned catalysts. Moreover, the economy seems to be on the mend, albeit at a slow pace. Thus, individuals may well be more inclined to spend on discretionary purchases such as theme parks this year.
The company is committed to returning money to shareholders through share repurchases and healthy dividend payments, which currently offer an above-average dividend yield to investors. That said, the leveraged balance sheet is a bit daunting. Six Flags has issued more debt in order to fund share repurchases, and the current 61% debt-to-capital ratio is high.
The stock price has risen significantly since the company re-emerged from bankruptcy in 2010 and the stock is currently trading within our 3- to 5-year earnings projections. Investors are seemingly enthused with the short-term growth strategies being implemented by management.
The details of the stock split are as follows: Shareholders on record as of June 12, 2013, will receive one additional stock for each share outstanding on June 26, 2013.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.