DG Stock Study (4-18-23)

I recently did a stock study on Dollar General Corp. (DG) with a closing price of $213.52.

M* writes:

     > A leading American discount retailer, Dollar General operates
     > over 18,000 stores in 47 states, selling branded and private-
     > label products across a wide variety of categories. In fiscal
     > 2021, 77% of net sales came from consumables (including paper
     > and cleaning products, packaged and perishable food, tobacco,
     > and health and beauty items), 12% from seasonal merchandise
     > (such as toys, greeting cards, decorations, and gardening
     > supplies), 7% from home products (for example, kitchen
     > supplies, small appliances, and cookware), and 4% from
     > apparel. Stores average roughly 7,400 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.

This large-size company has grown sales and EPS at annualized rates of 9.1% and 16.1%, respectively, over the last decade. Lines are up, straight, and parallel except for an EPS dip in ’21. PTPM has led peer and industry averages while posting a last-5-year average of 8.6%.

Also beating peer and industry averages over the last 10 years is ROE. ROE has trended higher from 19.1% in ’13 to 39.2% in ’22 with a last-5-year average of 32.7%. Debt-to-Capital was lower than peer and industry averages until ’19 when it spiked higher and continues to increase. The last-5-year average is an uncomfortably high 61.4%. Despite a Quick Ratio of only 0.09, Interest Coverage is 15 and Value Line gives an A rating for Financial Strength.

I forecast 4% long-term annualized sales growth based on the following:

• CNN Business projects 5.8% YOY and 6.7% per year for ’23 and ’22-’24, respectively (based on 25 analysts).
• YF projects YOY 5.7% and 7.3% for ’23 and ’24, respectively (24 analysts).
• Zacks projects YOY 5.8% and 7.3% for ’23 and ’24, respectively (22).
• Value Line projects 4.4% annualized growth from ’22-’27.
• CFRA projects 6.4% YOY and 7.3% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 6.5% per year along with 7.0% for the next 10 years in its analyst note.

I am forecasting below the range.

I forecast 7% long-term annualized EPS growth based on the following:

• CNN Business reports ACE of 4.9% YOY and 8.1% per year for ’23 and ’22-’24, respectively (based on 25 analysts), along with 5-year annualized growth of 9.7%.
• MarketWatch projects 8.2% and 8.6% per year for ’23-’25 and ’23-’26, respectively (29 analysts).
• Nasdaq.com projects 10.6% and 10.3% per year for ’24-’26 and ’24-’27, respectively (24, 23, and 5 analysts for ’24, ’26, and ’27).
• YF projects YOY 4.9% and 11.5% for ’23 and ’24, respectively (27), along with 5-year annualized growth of 8.7%.
• Zacks projects YOY 4.8% and 11.2% for ’23 and ’24, respectively (22), along with 5-year annualized growth of 10.6%.
• Value Line projects 8.1% annualized growth from ’22-’27.
• CFRA projects 5.5% YOY and 9.6% per year for ’23 and ’22-’24, respectively, along with a 3-year projected CAGR of 8%.
• M* projects long-term growth of 10.6%.

I am forecasting below the long-term-estimate range (mean of six: 9.3%).

My Forecast High P/E is 19. High P/E has trended higher over the last 10 years from 19.9 in ’13 to 24.6 in ’22 with a last-5-year average of 22.9. I am forecasting near the bottom of the range (only 18.8 in ’17 is lower).

My Forecast Low P/E is 14. Over the last 10 years, low P/E has ranged from 11.7 (’17) to 17.2 (’22) with a last-5-year average of 15.3. I am forecasting near the bottom of the range [’13 (13.7), ’17, and ’20 (11.8) are lower].

My Low Stock Price Forecast (LSPF) is the default value of $139.50. This is 30.0% below the previous close, 18.4% less than the 52-week low, and 13.8% less than the ’21 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%.

These inputs land DG in the HOLD zone with an U/D ratio of 1.1. Total Annualized Return (TAR) is 6.6%.

PAR (using Forecast Average—not High—P/E) is 3.8%: too low for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 277 studies done in the past 90 days (83 outliers removed including the current study), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 8.0%, 9.9%, 21.3, 14.3, and 18.4%. I am lower across the board. Value Line projects a future average annual P/E of 20, which is higher than MS (17.8) and me (16.5).

With regard to other data, MS high and low EPS are $16.80/share and $9.87/share compared to my $14.98 and $10.68. My low EPS may be higher due to recent quarterly growth while my high EPS is lower due to a lower forecast growth rate. MS LSPF is $146 (4.7% higher than mine). This is close to the default $9.87 * 14.3 = $141.14 [yay!].

With a robust MOS backing this study, I would look to re-evaluate under $183/share.