RE: Feature: Reverse SplitsMight as well post the whole story Ziggy1.....
Historically, a number of companies that employ a reverse split strategy tend to see their shares do better price-wise immediately after the split than in the longer term. Mainly because a lot of reverse splits are done only for cosmetic reasons and bring little fundamental horsepower to enhance shareholder value either pre-or post-split.
Following a reverse split, nothing really changes; the number of shares outstanding is reduced by the split factor and the price reflects the lesser number of shares. So, if there is a 1:10 reverse split of a 20 cent stock, shareholders will see each 1000 shares owned reduced to 100 shares post split, while the market price adjusts to $2 a share. The market value of the holding doesn’t change post a reverse split. As well, the company’s market cap remains the same and the fundamentals don’t change.
Caveat Emptor, most of the time…
A reverse split is a consolidation of a large outstanding share position that has ballooned as a result of a number of factors, including financings, stock options, acquisitions etc acquired in a company’s early days. The key thing with the success of a reverse split isn’t the act itself, as some would have you believe, but the state of the underlying company’s fundamentals.
The intelligentsia tends to dismiss reverse splits out of hand; mainly because in a lot of cases, it appears a shallow act of marketing to raise the share price, make the resultant capital structure more attractive to institutional buyers or merely a weak attempt to bolster a company’s flagging fortunes.
We believe that for ballistic and armored vehicle maker Force Protection, a reverse split should be viewed as positive for both the company and its shareholders.
Why? Simple. Strong fundamentals and prospects.
On December 30th, 2004, Force Protection (OTCBB: FRCP) received overwhelming support from its shareholders for the Board, at its discretion, to reverse split the company’s 200 million-odd shares between 1:2 and 1:12. No date has been announced for the proposed split that I’ve seen, but given the impressive progress of the company over the last year, the action can hardly be interpreted as either an act of market legerdemain or corporate desperation.
While there have been many trading opportunities in FRCP over the last year, the shares have been primarily grinding away between 25 and 30 cents for months. The activity appears to have perked up of late evidenced by a significant increase in daily trading volume. We would like to see a run to the highs of December last as a test of resistance and believe that a break above 40 cents would be very cool for those patient investors who have kept the faith.
FRCP is a long-term play, punctuated by good trading opportunities. We continue to suggest accumulation under 30 cents and especially on dips to the mid-20 cent level.
One is not like the others.
Unlike a lot of companies that employ the reverse split tactic, FRCP has a solid business, is in the right sector at the right time and has come out of 2004 with significant contracts and prospects. As well production facilities have increased significantly and vehicle production is now 500-plus a year versus under 200 in early 2004. The company’s order backlog is in excess of $20 million. Employee numbers have increased ten-fold and a trip over to Yahoo to peak at FRCP’s headlines shows that the company is getting more and more quality press and industry exposure—always a good thing.
A pretty complete discussion of the prospects for FRCP appeared in our November 29th and December 14th pieces—both worth a read for background.
If, as, and when FRCP decides to reverse split its shares doesn’t really concern me. Will there be volatility? Sure. This is the smallcap market. Could the shares sell off? Maybe, but the fundamentals are such that any nastiness would likely be short-lived. The war isn’t getting any easier, the need for FRCP’s type of vehicles will undoubtedly increase as the conflict wears on and its markets will likely expand as a result of other world tensions.
The company seems to have the support and the ear of the appropriate state and federal groups, so the potential for further contracts appear sound. Even though the company is still in its early stages, the growth to date has been extremely solid. Now, it’s a matter of the share price catching up to the business as well as reflecting what are, we believe, significant future prospects.
While patience is still the watchword, FRCP continues to look a good bet for the speculative end of a portfolio.