Is This Retailer Overvalued When Insiders Sell $2.2 Billion?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nobody knows the business better than insiders, especially the management team which runs the company on a daily basis. That is why investors should follow insiders’ trades as a reference to their own decision making for stocks.

Recently, insiders of Dollar General (NYSE: DG) have sold as many as 43.5 million shares for more than $2.2 billion. Chairman and CEO Richard Dreiling sold nearly 121,000 shares for more than $6.2 million. CFO David Tehle sold nearly 32,894 shares for more than $1.7 million. In addition, Chief People Officer, the Controller, Supply Chain VP and chief merchant officer have joined the selling force with the combined value of nearly $7 million. Last but not least, KKR sold 35.5 million shares for $1.8 billion, reducing its stake from 33.6% to 22.9%.

Dollar General is a discount retailer in the US, with nearly 10,000 stores located in 39 states in the US. Since being listed again in late 2009, it has enjoyed the steady rise in its stock price, from $22 in late 2009 to $51 now. 

<img src="/media/images/user_14219/screen-shot-2012-10-09-at-81252-pm_large.png" />

$51 per share is all time high for Dollar General. And it has reached the highest valuation since 2009. With the total market capitalization of $17 billion, Dollar General is valued at 19.5x P/E, 3.5x P/B and 17x P/CF. The enterprise value is $19.8 billion. Over the trailing twelve months, it generated $425 million in free cash flow. So the EV/FCF is as high as 46.5x.

However, compared to Dollar Tree , Family Dollar Stores (NYSE: FDO), and Wal-Mart (NYSE: WMT), Dollar General is not significantly overvalued. 


<table> <tbody> <tr> <td> <p>Valuation</p> </td> <td> <p><strong>DG</strong></p> </td> <td> <p><strong>DLTR</strong></p> </td> <td> <p><strong>FDO</strong></p> </td> <td> <p><strong>WMT</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>19.5</p> </td> <td> <p>21.1</p> </td> <td> <p>19.3</p> </td> <td> <p>15.9</p> </td> <td> <p>16.6</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>3.5</p> </td> <td> <p>7.1</p> </td> <td> <p>6.1</p> </td> <td> <p>3.6</p> </td> <td> <p>3.5</p> </td> </tr> <tr> <td> <p><strong>P/CF</strong></p> </td> <td> <p>17</p> </td> <td> <p>15.7</p> </td> <td> <p>17.2</p> </td> <td> <p>9.9</p> </td> <td> <p>9.3</p> </td> </tr> </tbody> </table>


From the comparison table above, DG and FDO seem to be fairly valued, similar to the industry’s valuation. DLTR is the most overvalued and WMT is the cheapest.

Over time the operating margin of DG has increased significantly, from 3.7% to 10.2%. The annual same stores sales has shot up from 2% to more than 7%, much better than WMT’s negative same stores sales during that time. There is a concern that when the economy comes back, consumers will move out of the discount channel and hurt DG’s operating performance. But I think that the risk is quite remote.

Personally, I consider Dollar General a good stock for investors to hold in the long run. However, with more than $2 billion in insider sales and its seemingly fair valuation on a relative basis, I would not consider buying DG at the moment. Rather, I will put DG on a watch list and wait for the opportunity to buy it for a lower price. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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