samedi 26 août 2017

The price to pay

About 3 years ago (july 2014), Dollar Tree announced it was planning to acquire Family Dollar.
About one year later (summer 2015), each Family Dollar shareholder got 79,55$ for each FDO share they owned (59,60$ cash + each stake of 4 FDO shares got transformed into one DLTR share).
Given the fact that FDO EPS was about 2,50$ in 2014, DLTR paid a high price. More than 30 times FDO earnings. And FDO wasn't growing like a stock that should be selling for 30 times earnings.

At the time it happened, I said to myself that it was expensive but exciting.
The integration can’t be fast and very effective when you're doubling the size of your business (it was a 9B$ transaction) by buying something that doesn't grow that much for 30 times earnings. 
 Managers weren’t wise to pay that price. That's exactly the opposite of what Couche-Tard managers usually do. 
DLTR managers were probably nervous that Dollar General would buy Family Dollar. So they raised their offer and they paid a generous price.

I was tempted a couple of times to sell my shares. But I liked the sector. And I thought the transaction was promising.
As seen below, it took time for the market to recognize the benefits of the transaction:  


Price of DLTR shares, August 2014 : 53$ 
EPS released in august : 0,59$

Price of DLTR shares, August 2015 : 76$ 
EPS released in august : (0,46$)

Price of DLTR shares, August 2016 : 83$
EPS released in august : 0,72$

Price of DLTR shares, August 2017 : 80$
EPS released in august : 0,98$


If it wasn’t for this week’s soaring, the price of DLTR shares would have been the same as in 2015. 

Yes, it took time. But this week, the results were great. DLTR beat estimates by 12 cents (14%) which is great. After a few years of stalling, DLTR is going in the right direction.

My advice would however be to sell a stock when a big acquisition is going for a high price. Just sell, and keep a close look. Jump back in the train if it goes well after a certain time.

2 commentaires:

  1. I am happy to be a dollar tree shareholder. The Family Dollar acquisition seems to be going well as well. I am quite happy about the consolidation work so far. One downside of Dollar tree is there isn't a major shareholder like Couchetard.. CEO seems to be just a quarter after quarter guy...

  2. Yeah, of there was a major shareholder, maybe they would never have bought Family Dollar.