DG Stock Study (7-16-24)

Posted by Mark on September 3, 2024 at 06:27 | Last modified: July 16, 2024 11:33

I recently did a stock study on Dollar General Corp. (DG, $126.96). Previous studies are here, here, and here.

M* writes:

     > With over 20,000 locations, Dollar General’s banner is nearly
     > ubiquitous across the rural United States. Dollar General serves
     > as a convenient shopping destination for fill-in store trips,
     > with its value proposition most relevant to consumers in small
     > communities with a dearth of shopping options. The retailer
     > operates a frugal store of about 7,500 square feet and primarily
     > offers an assortment of branded and private-label consumable
     > items (80% of net sales) such as paper and cleaning products,
     > packaged and perishable food, tobacco, and health and beauty
     > items at low prices. Dollar General also offers limited
     > assortment of seasonal merchandise, home products, and apparel.
     > The firm sells most items at a price point of $10 or less.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of 9.0% and 12.9%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’22 (FY ends Jan 31; references to year at BI and Value Line incremented to align) and a more serious correction in ’24 (down 29.3% YOY) that threatens visual inspection if recovery doesn’t come soon. Value Line gives an Earnings Predictability score of 80 that matches 10-year R^2 (0.80), but 5-year R^2 of 0.04 is what best tells the story right now.

Over the past decade, PTPM leads peer and industry averages despite falling from 8.9% (’15) to 5.5% (’24) with a last-5-year mean of 8.1%. ROE leads peer and industry averages while increasing from 19.8% (’15) to 25.7% (’24) with a last-5-year mean of 32.9%. Debt-to-Capital is less than peer and industry averages until ’20 when it spikes higher and continues to increase with a last-5-year mean of 69.8%.

Value Line gives a B++ grade for Financial Strength [down from “A” nine months ago]. Quick Ratio per M* is only 0.11 and Interest Coverage is 7.1. M* also gives a “Standard” rating for Capital Allocation and writes:

     > The firm holds a leverage target of 3 turns lease-adjusted
     > debt/EBITDAR… though its current leverage ratio exceeds the long-
     > term target amid a pullback in consumer spending, which has
     > weighed on financial results. While we expect Dollar General to
     > return to its leverage target over the next few years, it took
     > precautionary measures by suspending share repurchases as it
     > prepares for a precarious economic backdrop. We view this
     > decision as prudent but also an example of how significant
     > financial obligations can constrain financial flexibility.

With regard to sales growth:

• YF projects YOY 6.1% and 5.6% for ’25 and ’26, respectively (based on 28 analysts).
• Zacks projects YOY 6.1% and 5.5% for ’25 and ’26, respectively (23 analysts).
• Value Line projects 4.8% annualized growth from ’24-’29.
• CFRA projects 6.7% YOY and 6.9% per year for ’25 and ’24-’26, respectively.
• M* projects 5.0% (“mid-single-digit”) long-term growth in its analyst note.

I am forecasting below the range at 4.0% per year.

With regard to EPS growth:

• MarketWatch projects 4.7% and 7.7% per year for ’24-’26 and ’24-’27, respectively (based on 32 analysts).
• Nasdaq.com projects 13.2% and 12.6% per year for ’25-’27 and ’25-’28, respectively (25/24/5 analysts for ’25/’27/’28).
• Seeking Alpha projects 4-year annualized growth of 3.0%.
• YF projects YOY 4.6% contraction and 13.6% growth for ’25 and ’26 (29) along with 5-year contraction of 1.5%/year.
• Zacks projects YOY 4.5% contraction and 13.0% growth for ’25 and ’26 (24) along with 5-year growth of 7.1%/year.
• Value Line projects 8.8% annualized growth from ’24-’29.
• CFRA projects 6.8% YOY contraction and 5.9% growth per year for ’25 and ’24-’26 along with a 3-year CAGR of -7.0%.
• M* projects long-term annualized growth of 8.1%.

My 1.0% per year forecast (up from -1.0% in study 9 months ago) is toward the bottom of the long-term-estimate range (mean of five: 5.1%). Initial value is 2024 Q1 EPS of $6.87 (annualized) rather than ’23 EPS of $7.55/share.

My Forecast High P/E is 20.0. Over the past decade, high P/E increases from 20.6 (’15) to 31.1 (’24) with a last-5-year mean of 25.1 and a last-5-year-mean average P/E of 20.1. I am near bottom of the range [’18 (18.8) and ’19 (19.8) are lower].

My Forecast Low P/E is 11.0. Over the past decade, low P/E ranges from 11.7 in ’18 to 17.2 in ’23 with a last-5-year mean of 15.2. I am forecasting near bottom of the range [only ’18 (11.7) and ’21 (11.8) are lower].

My Low Stock Price Forecast (LSPF) of $82.40 is default given initial value from above. This is 35.1% less than the previous close and 18.1% less than the 52-week low.

Since dividend inception in 2016, Payout Ratio (PR) ranges from 13.6% in ’21 to 31.3% in ’24. I am forecasting below the range at 13.0%.

These inputs land DG in the HOLD zone with a U/D ratio of 0.4. Total Annualized Return (TAR) is 3.3%.

PAR (using Forecast Average—not High—P/E) of -1.1% is unacceptable for any size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that is less than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 47 studies (my study and 24 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 5.0%, 7.7%, 22.7, 15.0, and 19.6%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 20.0 is higher than MS (18.9) and higher than mine (15.5).

MS high / low EPS are $10.59 / $7.54 versus my $7.22 / $6.87 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $11.50 soars above both.

MS LSPF of $103.00 implies a Forecast Low P/E of 13.7: less than the above-stated 15.1. MS LSPF is 8.9% less than the default $7.54/share * 15.0 = $113.10 resulting in more conservative zoning. MS LSPF is 25.0% greater than mine, however.

With regard to valuation, PEG is 2.5 per Zacks [and 18.3—NMF—per my projected P/E]: somewhat expensive. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 0.92.

MOS is robust because my inputs (including most-recent-quarter initial value) are near or below respective analyst/historical ranges and MS averages. Although the latter comparison carries less impact due to small sample size, MS TAR of 19.6% is an eye-popping 16.3% per year greater than mine.

Dollar General has work to do before I would consider investment. Though down, the stock is not near its 52-week low. Debt load (liquidity) seems uncomfortably high (low). Analysts have reason to project tempered EPS growth for next couple years due to macroeconomic and industry challenges. With low forecast sales growth, I am giving a SELL rating at the present time.

Per U/D, DG is a BUY under $97/share. BI TAR criterion is met < $72 given a forecast high price ~$144.

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