A Form 4 filed with the SEC has disclosed that Sandra Cochrane, a member of Dollar General Corp. (NYSE:DG)’s Board of Directors, purchased nearly 2,000 shares of stock on April 2nd at an average price of $50.61 per share. A number of studies find that stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading). This makes sense to us since insiders have an economic incentive to diversify their wealth away from the company and thus reduce company-specific risk; buying shares, then, should only occur when they are particularly confident in its prospects. As a result we think that insider purchases make for a useful “stock screen” for names that investors can then research further.
Dollar General Corp. (NYSE:DG) grew its revenue by 8% in its most recent fiscal year (which ended in early February 2013) compared to the previous one, though sales growth was quite low in the fourth fiscal quarter. Same store sales growth was 5%, not a particularly high figure and suggesting that Dollar General Corp. (NYSE:DG) (or the dollar store concept as an industry) may be nearing market saturation. Earnings growth for the year was 24%, as operating income grew by 11% (so little change in operating margin) while interest expenses actually decreased in absolute terms.
The stock currently trades at 18 times trailing earnings, so the market in general is expecting continued earnings growth for the retailer. The forward P/E is 13, and even from that point Dollar General Corp. (NYSE:DG) would need to continue to deliver modest improvements. With financial performance not looking too good last quarter it may be wise to wait for more results to try to get an idea of how the company’s trajectory will play out. Billionaire Stephen Mandel’s Lone Pine Capital increased its stake in Dollar General Corp. (NYSE:DG) by 61% during the fourth quarter of 2012 to a total of over 13 million shares (see Mandel’s stock picks). Brookside Capital, a hedge fund managed by Bain Capital, was also buying the stock and closed December with 5.3 million shares in its portfolio (find Brookside’s favorite stocks).
Family Dollar (NYSE:FDO) and Dollar Tree (NASDAQ:DLTR) are smaller dollar stores in terms of market capitalization. Dollar Tree matches Dollar General’s trailing P/E of 18, while Family Dollar carries a small discount at 16 times its trailing earnings. Dollar Tree did much better in its most recent quarter, compared to the same period in the previous year, than Dollar General did: it reported double-digit growth rates of both revenue and earnings. So that company may be on sounder footing, and we’d be more interested in doing further research on it than on its larger peer. Family Dollar, meanwhile, has not been doing as well on the earnings front and its beta of 0.4- while low- represents considerably more dependence on the broader economy than what we see at the other two companies in this peer group. So its small discount looks to be appropriate rather than a pair trade opportunity.
We can also compare Dollar General to Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Each of these two retailers carries a trailing P/E of 15 and a forward P/E in the 12-13 range- so they are cheaper than the dollar stores, but lower earnings growth over the next couple years pulls them about even on a forward basis. Growth rates have in fact been lower, at least lower than Dollar Tree: looking at last quarter, Wal-Mart Stores, Inc. (NYSE:WMT)’s earnings were up 9% from their levels a year ago while Target Corporation (NYSE:TGT)’s actually declined slightly. Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) also pay dividend yields of above 2%.
Wal-Mart Stores, Inc. (NYSE:WMT) seems like it might make for a potential value stock, but at least at this point Dollar Tree- and possibly the other two dollar stores as well, depending on how further results turn out- is an interesting prospect for further research.