Dollar General Secondary Discount May Bring Another Opportunity

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Dollar General Corp. (NYSE: DG) is a stock that we have said over and over is “money” for long-term investors. The one thing that has acted as a continued drag is that private equity backer and former owner Kohlberg Kravis Roberts & Co. (NYSE: KKR) keeps dumping stock as the firm could not sell enough shares at the re-IPO in 2010 due to market conditions.

A poorly timed secondary offering has now added more pressure. The good news is that this may be giving investors yet another chance to get in on this secular story. Our caveat is simply to have patience.

KKR has now sold 30 million shares in a public secondary public offering at $50.75 per share. None of the shares were sold by Dollar General itself, and that means that none of the proceeds will end up in the company’s coffers.

The book-running managers for the secondary offering were Citigroup, Goldman Sachs and KKR. The underwriting group received an overallotment option for up to 4.5 million additional shares.

Investors and traders will both take note that the shares are slightly under the $50.75 price. The stock had been at $52.00 before the deal was announced, and we just noticed this week that one ratings agency raised its corporate credit rating to investment grade. The 52-week trading range is $39.73 to $56.04, and the consensus price target from Thomson Reuters is $53.22.

We see that Dollar General can still rise up to $60.00 over the intermediate term to longer term. That may take one to two years, but the top Wall St. analyst target is also $60.00 for the stock. That late-2012 sell off into the low $40s was just oversold too much. That being said, the snapback recovery with a strong stock market has taken the stock back up in short order.

We still would like to see this stock drift lower into the high-$40s again for fresh money buyers. However, it may take a sudden market sell-off or a big wave of profit taking for Dollar General’s shares to pull back that much.

One final note: this may be the next to last secondary offering ever from KKR. The private equity firm’s Buck Holdings affiliate will only hold 20.1 million to 24.6 million shares after this offering. The range depends on whether the overallotment option is exercised. Still, that leaves a smaller amount of stock remaining under KKR than what we saw for this entire 30 million share secondary offering.