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Earlier this week Citigroup (C) announced it would enact a 1 for 10 reverse stock split. The split will be effective after the close of trading on May 6, 2011. Many companies use reverse stock splits so their stock will trade at higher levels. Another financial giant, AIG, enacted a 1 for 20 reverse stock split which helped get its shares from well under $5 to current levels around $36.
There are several reasons why a company will enact a reverse split:
  1. As Michael Holland, chairman of money manager Holland & Co., said in reference to Citigroup's under $5 share price: "When the stock's selling at that low a price, there's just an air of something that's not quite as healthy as it should be."
  2. Some funds cannot or will not buy stocks that trade for less than $5 per share for various reasons. One reason is that they are considered to be "penny stocks" (even though they trade for over $1) and therefore are more speculative. Some brokerages have higher margin requirements for shares trading under $5.
  3. A low share price (under $5) looks weak and can hurt the image of a company, and its ability to recruit new employees, customers, vendors and of course, investors.
  4. Reducing the number of shares outstanding will often reduce the number of small shareholders. This can often save a company money in printing and the cost of mailing annual reports and proxy materials.
I am not a big fan of reverse splits as they often cause the share price to drop when they are announced, but sometimes they do serve a purpose and can be beneficial in the long run. I think the companies below are possible reverse stock split candidates. Just like Citigroup, these companies all have share prices that are below $5 and have been below that threshold for a very long time.
1. Vantage Drilling (VTG) shares are trading at $1.95. Vantage is an offshore drilling company. Earnings estimates indicate a profit of 10 cents per share for 2011.
Why Vantage might want to consider a reverse split: Vantage has been losing money and unfortunately the company raised capital during the financial crisis when the stock price was very low. This resulted in significant dilution and the company now has many shares outstanding. According to Yahoo Finance, VTG has nearly 300 million shares outstanding, which is too many for a small company like this. Without a reverse stock split, it seems unlikely these shares will trade for over $5 per share.
2. Sprint (S) shares are trading at $4.56. Sprint is a leading telecommunications company. Earnings estimates indicate a loss of 79 cents per share for 2011.
Why Sprint might want to consider a reverse split: Sprint has been losing money and has too many shares outstanding. According to Yahoo Finance, Sprint has nearly 3 billion shares outstanding. A higher share price could boost confidence with Sprint for employees, investors and customers.
3. Sirius XM Radio (SIRI) shares are trading at $1.70. Sirius is the leading satellite radio company. Earnings estimates indicate a profit of 3 cents per share for 2011 and 5 cents for 2012.
Why Sirius might want to consider a reverse split: Sirius has been losing money and the company has too many shares outstanding. According to Yahoo Finance, SIRI has nearly 4 billion shares outstanding. A higher share price could boost confidence with employees, investors and customers. Sirius has long been a rumored reverse stock split candidate.
4. Eastman Kodak (EK) shares are trading at $3.13. Eastman Kodak is maker of cameras, photography products and provides digital services. Earnings estimates indicate a loss of 45 cents per share for 2011.
Why Eastman Kodak might want to consider a reverse split: Eastman Kodak has been losing money and this has kept the share price low for a very long time. According to Yahoo Finance, EK has about 268 million shares outstanding. This is not too many shares for a company with billions of dollars in revenues, but without a reverse split, it seems unlikely the shares will trade for over $5 anytime soon. In terms of image, it could be helpful to have a higher share price.
5. Jamba Juice (JMBA) shares are trading at $2.12. Jamba is a maker and retailer of smoothies and other food products. Earnings estimates indicate a loss of 11 cents per share for 2011.
Why Jamba might want to consider a reverse split: Jamba has been losing money and this has kept the share price at low levels for years. According to Yahoo Finance, JMBA has about 66 million shares outstanding, which is not too many, but without a reverse split it seems unlikely the shares will trade for over $5 anytime soon. A higher stock price through a reverse split could help the image of this company with employees and investors.
6. Level 3 Communications (LVLT) shares are trading at $1.42. Level 3 is a network and Internet service provider. Earnings estimates indicate a loss of 38 cents per share for 2011.
Why Level 3 might want to consider a reverse split: Level 3 has been losing money and the company has many shares outstanding. According to Yahoo Finance, LVLT has about 1.67 billion shares outstanding which is too many. Without a reverse stock split, it seems unlikely these shares will trade for over $5 per share.
The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: 6 Candidates for a Reverse Stock Split