DG Stock Study (7-19-23)
Posted by Mark on August 11, 2023 at 06:27 | Last modified: July 19, 2023 15:08I recently did a stock study on Dollar General Corp. (DG) with a closing price of $164.49. The original study is here.
M* writes:
> A leading American discount retailer, Dollar General operates
> over 19,000 stores in 47 states, selling branded and private-
> label products across a wide variety of categories. In fiscal
> 2022, 80% of net sales came from consumables (including paper
> and cleaning products, packaged and perishable food, tobacco,
> and health and beauty items), 11% from seasonal merchandise
> (such as toys, greeting cards, decorations, and gardening
> supplies), 6% from home products (for example, kitchen
> supplies, small appliances, and cookware), and 3% from
> apparel. Stores average roughly 7,500 square feet, and about
> 75% of Dollar General locations are in towns of 20,000 or
> fewer people. The firm emphasizes value, with most of its
> items sold at everyday low prices of $5 or less.
Over the past decade, this large-size company has grown sales and EPS at annualized rates of 9.1% and 16.1%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’21. PTPM leads peer and industry averages while decreasing from 9.3% in ’13 to 8.2% in ’22 with a last-5-year mean of 8.6%.
Also over the past decade, ROE leads peer and industry averages while trending higher from 19.1% in ’13 to 39.2% in ’22 with a last-5-year mean of 32.7%. Debt-to-Capital is lower than peer and industry averages until ’19 when it spikes higher and continues to increase. The last-5-year mean is somewhat uncomfortable at 61.4%.
Despite a Quick Ratio of only 0.06, Current Ratio is 1.32 and Interest Coverage is 13.1. Value Line gives an A rating for Financial Strength while M* gives a Standard rating for Capital Allocation.
With regard to sales growth:
- CNN Business projects 4.0% YOY and 5.4% per year for ’24 (FY ends Jan 31; I label by ending date) and ’23-’25, respectively (based on 25 analysts).
- YF projects YOY 4.0% and 6.6% for ’24 and ’25, respectively (26 analysts).
- Zacks projects YOY 3.9% and 6.6% for ’24 and ’25, respectively (22).
- Value Line projects 4.0% annualized growth from ’23-’28.
- CFRA projects 4.6% YOY and 5.9% per year for ’24 and ’23-’25, respectively.
- M* offers a 2-year ACE of 6.5%.
I am forecasting at the bottom of the range: 4.0%.
With regard to EPS growth:
- CNN Business reports ACE of 5.7% YOY contraction and 1.3% growth per year for ’24 and ’23-’25, respectively (based on 25 analysts), along with 5-year annualized growth of 4.4%.
- MarketWatch projects annualized growth of 1.4% and 4.9% for ’23-’25 and ’23-’26, respectively (30 analysts).
- Nasdaq.com projects growth of 9.9% and 10.7% per year for ’24-’26 and ’24-’27, respectively (24, 16, and 5 analysts).
- Seeking Alpha projects 4-year annualized growth of 5.0%.
- YF projects YOY 5.7% contraction and 9.3% growth for ’24 and ’25 (29), along with 5.3% growth/year x5 years.
- Zacks projects YOY 6.1% contraction and 8.7% growth for ’24 and ’25 (22), along with 9.6% growth/year x5 years.
- Value Line projects 6.3% annualized growth from ’23-’28.
- CFRA projects 2.8% YOY contraction and 6.8% growth per year for ’24 and ’23-’25, respectively, along with a 3-year projected CAGR of 6.0%.
- M* projects long-term annualized growth of 10.6%.
I am forecasting below the long-term-estimate range (mean of six: 6.9%) at 4.0% per year based on ’23 EPS of $10.68/share.
My Forecast High P/E is 19.0. Over the past decade, high P/E has increased from 19.9 to 24.6 with a last-5-year mean of 22.9. Last-5-year-mean average P/E is 19.1. I am forecasting near the bottom of the range (only 18.8 in ’17 is lower).
My Forecast Low P/E is 13.0. Over the past decade, low P/E has ranged from 11.7 (’17) to 17.2 (’22) with a last-5-year mean of 15.3. I am forecasting near the bottom of the range [only ’17 and ’20 (11.8) are lower].
My Low Stock Price Forecast (LSPF) of $182.20 is the default based on $10.68/share initial value. This is 22.1% less than the previous close and 15.3% less than the 52-week low.
Since a dividend was first issued in ’15, Payout Ratio has ranged from 13.6% in ’20 to 22.6% in ’16. I am forecasting below the range at 13.0%.
These inputs land DG in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 9.6%.
PAR (using Forecast Average—not High—P/E) of 5.4% is too low for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.
To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 248 studies done in the past 90 days (my study and 95 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.1%, 9.3%, 21.5, 14.5, and 17.9%. I am lower across the board. Value Line projects a future average annual P/E of 20.0, which is higher than MS (18.0) and mine (16.0).
MS high/low EPS is $16.71/$10.23 vs. my $12.99/$10.68 (per share). My high EPS is lower due to a lower growth rate and my overall EPS range is lower.
MS LSPF of $146.60 implies a Forecast Low P/E of 14.3, which is very close to the above-stated 14.5. MS LSPF is only 1.2% less than the default $10.23/share * 14.5 = $148.34, which results in more conservative zoning. MS LSPF remains 14.4% greater than mine.
MOS in the current study is robust.
PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. PEG is 1.68 per Zacks using its 9.6% growth rate and much higher using my 4.0%. Relative Value is 0.79 (M*). These are suggestive of an overvalued and undervalued stock, respectively.
According to Kim Butcher’s “quick and dirty DCF,” fair value for the stock is 14.5 * [$19.00 – ($3.00 + $6.40)] = $232.00 (i.e. stock undervalued by 29.1%).
I would look to re-evaluate DG under $157/share.
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