KeyStone’s Stock Talk Podcast Episode 163
We’re back, starting this week’s episode with a discussion on stock splits. Why? Alphabet (AKA Google), recently announced it will be proceeding with a 20-1 stock split, and given the company has been a long-term Focus Buy recommendation, we are here to talk about how stock splits work and why multiple analysts and financial talking heads have proclaimed this a bullish sign for Alphabet’s stock.
In our Your Stock, Our Take segment, Aaron answers a listener question on Intel Corporation (INTC:NASDAQ), the world’s largest manufacturer of PC microprocessors, which just announced a proposed $58 billion acquisition of Tower Semiconductor. The listener points out Intel has a low PE, pays a good dividend, appears out of favor and asks whether we see value at present.
Brennan also answers a listener question on ScreenPro Security Inc. (SCRN:CSE), a Screening and Medical Technology company that provides turnkey COVID-19 screening solutions with its alerting software, GoStop. The listener asks if we see value and growth potential in the recent listing.
Welcome to my co-hosts, Brennan & Aaron.
Brennan, I have a question for you.
Say you had a $100 bill, and someone offered you two $50 bills for it. Would you accept the offer and make the trade?
Like most of your questions to me….that one was kind of pointless. Most people don’t get excited over a proposition like this. And rightfully so – you end up with the same amount of money.
In the stock market, however, when presented with a similar situation, investors often lose their minds with joy.
The situation I am talking about is stock splits. Recently, one of our Longer-Term Focus Buy recommendations, Alphabet (AKA Google), announced a 20-1 stock split, so we thought a quick primer on stock splits, a relatively simple concept was in order.
What Is a Stock Split?
A stock split is an action performed by a public company (or stock) that increases the number of outstanding shares. It is done by dividing each share into multiple ones—diminishing its stock price in the process. A stock split, though, does nothing to the company’s market capitalization. This figure remains the same, the same way a $100 bill’s value doesn’t change when it’s exchanged for two $50s. With a 2-for-1 stock split, each stockholder receives an additional share for each share held, but the value of each share is reduced by half. This means two shares now equal the original value of one share before the split.
Let’s say Stock A trades at $50 and has 10 million shares issued. This gives it a market capitalization of $500 million ($50 x 10 million shares). The company then implements a 2-for-1 stock split. For each share shareholders currently own, they receive another. They now have two shares for each one previously held, but the stock price is cut by 50%—from $50 to $25. Note the market cap stays the same, doubling the number of shares outstanding to 20 million while simultaneously reducing the stock price by 50% to $25 for a capitalization of $500 million. So, the true value of the company hasn’t changed at all.
Reverse Stock Split
Companies can also implement a reverse stock split. A 1-for-10 split means that for every 10 shares you own, you get one share.
Reasons for Stock Splits
There are many reasons, but the first is basic psychology. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, while small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more attractive level (in theory). While the actual value of the stock doesn’t change at all, the lower stock price may affect the way the stock is perceived, enticing new investors. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the price rises, they have more stock to trade.
Another reason, and arguably a more logical one, is to increase a stock’s liquidity. This increases with the stock’s number of outstanding shares. Stocks that trade above hundreds of dollars per share can result in large bid/ask spreads.
Neither of these reasons or potential effects agrees with financial theory. From a purely financial perspective, splits are totally irrelevant—yet companies still do them. Splits are a good demonstration of how corporate actions and investor behavior do not always fall in line with financial theory. This very fact has opened up a wide and relatively new area of financial study called behavioral finance.
Alphabet specifically.
In the wake of Alphabet’s announced 20-1 stock split I have read many articles going so far as to say “Google stock is finally affordable”…..or this direct quote from Bank of America declaring, “Alphabet’s split decision bodes well for shares”.
Alphabet’s (NASDAQ: GOOG) (NASDAQ: GOOGL) proposed 20:1 stock and more aggressive buybacks indicates that management is becoming more shareholder-friendly, according to BofA.
The article does go on to point out that most stocks that split, do so because the share price was performing well – indicating strong momentum which tends to continue.
To that, I say, well duh.
In my opinion, the fact more stocks have performed well following a split is not a result of the split itself – it is a product of the fact that the strong fundamental performance (ie. Strong cash flow growth) that pushed the share price to high levels causing the split tend to continue in the near-term following a split. Saying the split caused the outperformance is akin to saying the tail is wagging the dog. You are assigning power to the wrong source. What powers the stock is strong financial performance, not a stock split.
Don’t buy a stock for the split, buy it if you see strong financial performance going forward.
Your Stock Our Take
Came in from Andrew via Facebook
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ScreenPro Security Inc. (SCRN: CSE)
Current Price: $0.02
Market Cap: $8.3 Million
What does the company do?
ScreenPro Security is a Screening and Medical Technology company that provides turnkey COVID-19 screening solutions with its alerting software, GoStop. The company has access to multiple manufacturers of high-quality test kits and partnerships with Labs in Vancouver & Ontario which allow the company to be a nationwide provider of full-service testing solutions across Canada.
Key Points:
- The company was essentially a spinoff from Datametrex (DM:TSX-V) where in March 2021, the company completed a reverse takeover transaction and began trading on the CSE. Since listing, the company’s shares have been in a bit of a slide – down from around $0.15 cents to just $0.02 cents where they are trading today.
- In January 2022 the company announced it is expanding newly deployed mobile testing units in the Greater Vancouver and Greater Toronto Area.
Recent Financial Results: (Q3, 2021)
- Revenue was $3.9 million compared to no revenue for the same Q last year.
- Net income was $724K compared to a loss of $(38K) thousand for Q3 2020.
- One thing I will note here is that it will be quite difficult for the company to post meaningful earnings per share considering the company has over 380 million shares outstanding.
- Adjusted EBITDA was $812K compared to a loss ($32K) for Q3 2020.
- Balance sheet – $149K in cash, with no debt.
- Valuation basis – if we annualize net income in the last quarter, we can reasonably predict the company to generate $3.0 million in earnings, which provides a P/E multiple of 2.8x.
Now if these projections can be achieved, I certainly believe the company could offer value in its current range… but whether these targets are achievable is unknown… especially as we potentially come out of a pandemic and into an endemic.
Our Take:
Personally, I think that it’s a very interesting business that is breaking into profitability, has a good balance sheet, and is trading with low valuation multiples. But the forward thesis here does have some question marks around it as to whether COVID-19 testing will continue to offer growth opportunities going forward, especially if one thinks that we are on the way out of the pandemic. And this is realistically the primary risk here, the market is always looking forward and with the possibility that COVID testing will start to decline in the mid-to-near future, the low valuation multiples may be an indication that the market anticipates growth and earnings to begin to wane. But on the other hand, the case can certainly be made that COVID-19 testing will be a key aspect of our world for years to come and offer the company growth potential.
Now I am skeptical on whether the company can achieve their Pro-Forma revenue and earnings guidance provided in their investor presentation – but if achieved the stock could possibly offer value.
The bottom line here is that this is a high-risk play for individuals who believe COVID-19 testing will offer the company significant room for growth – which in my opinion, is pretty difficult to predict going forward.
Wayne via submission
Interested in comments on Intel (low PE and basic financials). It pays a good dividend. Recent changes in board and management. General chip shortage. Acquisition of Tower semiconductor (Focus on Foundry ops and custom chips). Out of favor compared with peers especially AMD.
Intel Corporation (INTC)
Price: $48.30
Market Cap: $196 billion
Yield: 3%
What Does the Company Do?
Intel is a designer and manufacturer of microprocessors for computer system manufacturers, as well as motherboard chipsets, network interface controllers and integrated circuits, flash memory, graphics chips, embedded processors, and other devices related to communications and computing. Intel is the second-largest chip manufacturer in the world by revenue.
Our Take
We have monitored Intel for several years because at face value the company does have some interesting characteristics.
One would think that it would have been a strong performer over the last year given the chip shortages and that some semiconductor and chip companies have had very strong runs. For example, Intel’s competitor Advanced Micro Systems (AMD) is up almost 30% over the last year and this is after a very sizeable pullback since November.
But unfortunately, Intel’s stock has done less than nothing for investors over the last year; down 24% in the past 12 months. Looking back 3 years even, the stock price has moved up and down a lot but ultimately hasn’t gone anywhere. Compare that once again to AMD which has exploded and is up nearly 500% over the past 3 years. With all of the innovation that has happened in technology over this period, its hard to understand how Intel’s shareholders have not participated in the gains.
A few things to note are that Intel has taken a lot of heat essentially for more than a decade for losing other on key shifts in the market. This started with the emergence of smart devices like iPads and iPhones which Intel missed. Later on, its was graphic processing units (GPUs) that are used in gaming but also in A.I. and machine learning systems. The situation here is that there have been lost opportunities for the company and the market legitimately questions its ability to continue to innovate and maintain market share while playing catch up with competitors.
Recent Financial Results
- The company is cheap trading at about 6 times cash flow but it has not been a growth stock.
- Revenue growth was about 3% in the last quarter and 4% on average over the last 3 years.
- Earnings per share in the last quarter were down 21% and basically flat (or down 2%) for the full year of 2021.
- Based on the company’s guidance, it looks like they are expecting a sizeable drop in earnings per share for the first quarter of 2022 to $0.80 per share, compared to $1.39 per share, in the same quarter last year.
Conclusion
I would classify Intel as a value stock but not one that I would rush out to buy. The financial performance has been very lackluster and it appears that the expectation is for negative earnings growth in 2022, while competitors like AMD are expected to continue to grow earnings at a double-digit rate.
There is the recently announced $58 billion acquisition of Tower Semiconductor. Intel says they expect this acquisition to be immediately accretive. This could help but I don’t know if it solves the company’s underlying problems, one of which is a complete lack of confidence from investors.
I would personally take a wait-and-see approach on Intel. There is no reason I can see that would persuade me to rush into the stock, especially given the negative momentum on the stock price and negative earnings growth expected to start off this year.
Intel is a story that needs a turnaround and I would not park much capital with the company until I see a clear sign that this turnaround is happening.
