A number of The Ultimate Software Group, Inc. (Nasdaq: ULTI) insiders just sold $55.1 million worth of shares. It’s worth taking a closer look at the company with the stock trading at a rich valuation following its recent earnings announcement.
Insider Selling: The Ultimate Software Group
A number of insiders have been selling shares of Ultimate Software Group according to recent form 4 filings with the SEC. Notable insiders include Scott Scherr (CEO), Mitchell Dauerman (CFO), Marc Scherr (COO) and other executives as shown in the table below. Total insider selling has totaled $55.1 million since last Thursday which is nearly 1% of Ultimate Software Group’s total market capitalization.
|Insider Trading||Relationship||Date||#Shares||Value ($)|
|Scott Scherr||Chairman and CEO||Feb 12||78,356||$17,667,836|
|Mitchell Dauerman||CFO and Treasurer||Feb 12||19,588||$4,419,493|
|Marc Scherr||Vice-Chairman & COO||Feb 12||51,195||$11,555,827|
|Rogers Adam||VP, Technology||Feb 12||3,563||$813,775|
|Swick Gregory||VP, Enterprise Sales||Feb 12||2,968||$677,298|
|Phenicie John C||VP, Workplace Sales||Feb 12||7,088||$1,605,263|
|Scott Scherr||Chairman and CEO||Feb 09||32,166||$7,152,805|
|Mitchell Dauerman||CFO and Treasurer||Feb 09||8,537||$1,899,720|
|Marc Scherr||Vice-Chairman & COO||Feb 09||32,156||$7,150,166|
|James Fitzpatrick||Director||Feb 08||4,230||$967,111|
|Manne Robert||Senior VP, General Counsel||Feb 08||5,000||$1,144,269|
Scott Scherr (Chairman and CEO) most recently sold $17.7 million worth of shares on Monday, February 12th. This is what propelled me to take a closer look at the company’s insider activity.
Potential Reasons For Insider Activity
The Ultimate Software Group provides cloud-based human capital management solutions primarily to enterprise companies in the United States and Canada. The company was founded in 1990 and is headquartered in Weston, Florida.
On February 6th, management reported its Q4’17 earnings that easily beat its earnings and sales estimates. The stock has since jumped 8.0% and now appears to be trading at a premium valuation.
Analysts covering the stock often compare the company to a peer group that includes Salesforce.com (NYSE: CRM), Tyler Technologies (NYSE: TYL), Paycom Software (NYSE: PAYC) and ACI Worldwide (NasdaqGS: ACIW). Analyzing Ultimate Software Group’s valuation metrics and ratios relative to its peer group offer insight into why insiders may be selling their shares.
A company’s EBITDA multiple is calculated by dividing its Enterprise Value by EBITDA and is often used to benchmark the fair market value of a company. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt.
Ultimate Software Group’s LTM EBITDA multiple of 91.6x is above all of its selected comparable public companies: CRM (55.7x), TYL (34.2x), PAYC (55.8x) and ACIW (15.4x). Not only is the company’s multiple above all of its peers, but it’s significantly above implying that shares may be trading at a hefty premium.
The company’s shares last traded at $230.95 as of Tuesday, up 16.6% over the last three months. While the stock has made impressive gains, the recent insider transactions could signal a troubling road ahead for shareholders.
In addition, finbox.io’s average fair value estimate of $207.41 implies -10.2% downside and is calculated from 8 valuation models as shown in the table below. Each analysis uses consensus Wall Street estimates for the projections when available.
|Analysis||Model Fair Value||Upside (Downside)|
|10-yr DCF Revenue Exit||$241.92||4.8%|
|5-yr DCF Revenue Exit||$261.51||13.2%|
|Peer Revenue Multiples||$189.82||-17.8%|
|10-yr DCF EBITDA Exit||$291.36||26.2%|
|5-yr DCF EBITDA Exit||$290.72||25.9%|
|Peer EBITDA Multiples||$117.32||-49.2%|
|10-yr DCF Growth Exit||$145.75||-36.9%|
|5-yr DCF Growth Exit||$120.93||-47.6%|
How Should You Interpret this?
While executives are always happy to tell you all the reasons why their stock is a buy, their actions can tell a different story about the company’s future prospects. A trend of selling activity may indicate that insiders think the stock is going down over the upcoming time period, and are trying to sell before the price falls.
Keep in mind that insider activity is only one aspect of stock research and that there are other important items to consider. I recommend you continue to research Ultimate Software Group to get a more comprehensive view of the company’s fundamentals by looking at:
Valuation: how much upside do shares of Ultimate Software Group have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.
Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company’s return on invested capital ratio here.
Forecast: what is Ultimate Software Group’s projected EBITDA margin? Is the company expected to improve its profitability going forward? Analyze the company’s projected EBITDA margin here.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
Matt can be reached at firstname.lastname@example.org.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.