Value investing

U.S. Geothermal (HTM) Stock Split Could Draw More Institutional Investors and Retail Brokers

According to a recently filed proxy statement, the Board of Directors and Management Team of U.S. Geothermal Inc. (NYSE MKT: HTM), a leading and profitable renewable energy company focused on geothermal energy, is recommending and proposing a share consolidation, otherwise known as a reverse stock split, in order to increase its share price and attract more institutional investors and brokerage firms. With a current price of $0.72 per share, many institutional investors and brokerage firms have internal restrictions on stocks below certain trading price thresholds and are prevented from buying shares of U.S. Geothermal

In this article, we will take a look at the importance of the upcoming vote and why a reverse stock split could be in the best interest for shareholders over the long-term.

Proposed Reverse Split

U.S. Geothermal plans on conducting a reverse stock split of up to 1-for-6, which could potentially reduce outstanding shares of common stock from approximately 113 million to approximately 18.9 million. Since the underlying value of the company will remain the same, the market price per share would increase given the fewer number of outstanding shares. Proportionate voting rights and other rights would also remain unaffected by the move.

The company noted that the reverse split is not necessary to maintain its listing on the NYSE MKT stock exchange – that is, The Company is not in danger of being delisted. The NYSE MKT team has informed the company that, given its profitability, strong asset base, and long-term fixed price power sales contracts, it’s not in danger of any potential listing downgrade. The stock price alone – being under $1.00 per share – does not impact continued trading on the exchange.

Shareholders will have an opportunity to vote on the share consolidation on September 30, 2016 at the company’s annual meeting or in their mail-in proxy statement. In addition, investors can find more information about the reverse stock split in Proposal 4 of the proxy statement.

Reasons to Consider

Historically, reverse stock splits tend to have a mixed reaction with investors on Wall Street. While some companies use reverse stock splits in the face of steep losses – making it a bearish signal, U.S. Geothermal has seen its stock price appreciate more than 15% so far this year and is simply seeking to broaden its appeal to institutional investors – a bullish signal. Investors that are historically against reverse stock splits may therefore want to reconsider the rationale behind it.

Some key reasons for the reverse stock split include:

  • Institutional Investors – Many brokerage firms and institutional investors have internal policies that prevent them from investing in low-priced stocks or discourage brokers from recommending them to their clients. A reverse stock split could increase the price of the company’s stock and no longer make it subject to these policies.
  • Lower Volatility – Greater institutional ownership tends to reduce the volatility of common stock since many of these institutions are long-term investors rather than short-term traders. By contrast, many stocks trading under $1.00 are manipulated by short-term traders that aim to make quick profits followed by steep declines.
  • Reduced Trading Costs. The NYSE MKT charges brokers a cost per share fee for every share that is traded, which means that an investor purchasing a fixed dollar value of stock will pay more with lower per share prices. A reverse stock split could reduce these overall transaction costs and could possible make the stock more appealing.
  • Earnings Relevance. Earnings per share is a common metric that investors look at when evaluating a company. With the company’s low stock price, its earnings per share is often a fraction of a penny, which makes financial analysis and modeling difficult. A higher stock price – made possible with a reverse stock split – would increase the legibility of these figures.


Looking Ahead

U.S. Geothermal is a profitable and growing renewable energy company that’s seeking to broaden its appeal to institutional investors and brokerage firms through a reverse stock split. The company has reported 15 consecutive quarter of profits and has a growth target to potentially achieve a $1 billion market cap by 2020. While reverse stock splits have been viewed negatively by some, the rationale behind the company’s move to enact the stock split appears sound. James Pappas of JCP Investments, the company’s largest shareholder commented, “The largest shareholders of U.S. Geothermal stand to gain or lose the most, and I believe this to be good for the capital structure for all equity holders. I am strongly in favor of the proposed reverse split recommended by management.”

Investors are encouraged to consider voting YES on proposal number 4 during the upcoming annual meeting on September 30 to enact these changes.

For more information, visit the company’s website at www.usgeothermal.com.