DG Stock Study (10-19-23)

Posted by Mark on January 19, 2024 at 06:19 | Last modified: October 19, 2023 11:01

I recently did a stock study on Dollar General Corp. (DG) with a closing price of $116.02. Previous studies are here and 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 ’22. PTPM leads peer and industry averages while decreasing from 9.3% (’14) to 8.2% (’23) with a last-5-year mean of 8.6% (FY ends Jan 31).

Also over the past decade, ROE leads peer and industry averages while trending higher from 19.1% (’14) to 39.2% (’23) with a last-5-year mean of 32.7%. Debt-to-Capital is less than peer and industry averages until ’20 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 0.08, Current Ratio is 1.39 and Interest Coverage is 10.5. Value Line gives an A rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation and writes:

     > Dollar General has featured a sound balance sheet
     > historically, and we see little reason for solvency concerns
     > moving forward as we look at the firm’s midterm prospects.

With regard to sales growth:

• CNN Business projects 4.0% YOY and 5.4% per year for ’24 and ’23-’25, respectively (based on 27 analysts).
• YF projects YOY 1.9% and 5.3% for ’24 and ’25, respectively (25 analysts).
• Zacks projects YOY 2.3% and 5.3% for ’24 and ’25, respectively (10 [sic?]).
• Value Line projects 4.0% annualized growth from ’23-’28.
• CFRA projects 2.3% YOY and 4.5% per year for ’24 and ’23-’25, respectively.
• M* offers a 2-year ACE of 3.4%/year.

I am forecasting near the bottom of the range at 2.0% per year.

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 27 analysts), along with 5-year annualized contraction of 6.1%.
• MarketWatch projects annualized contraction of 14.8% and 7.1% for ’23-’25 and ’23-’26, respectively (33 analysts).
• Nasdaq.com projects annualized growth of 9.5% and 11.7% for ’24-’26 and ’24-’27, respectively (17, 15, and 5 analysts for ’24, ’26, and ’27).
• Seeking Alpha projects 4-year annualized contraction of 4.9%.
• YF projects YOY 29.9% contraction and 3.6% growth for ’24 and ’25, respectively (27), along with 5-year annualized contraction of 6.5%.
• Zacks projects YOY 28.5% contraction and 4.1% growth for ’24 and ’25, respectively (23), along with 5-year annualized growth of 7.2%.
• Value Line projects 2.0% annualized growth from ’23-’28.
• CFRA projects contraction of 30.5% YOY and 11.1% 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 6.5%.

I am forecasting just below the mean long-term estimate (-0.3%) at -1.0% per year. This is not conservative unless one is convinced the company will grow long-term earnings. Analyst long-term estimates are split with three each siding for growth and contraction. I will use 2024 Q2 EPS of $9.76 (annualized) rather than ’23 EPS of $10.68/share to get a high EPS of 9.76 * (0.99 ^ 5) = $9.28/share. As low EPS, $9.76 * (0.97 ^ 5) = $8.38/share uses a -3.0% [arbitrary] growth rate.

My Forecast High P/E is 19.0. Over the past decade, high P/E increases from 19.9 (’14) to 24.6 (’23) with a last-5-year mean of 22.9. The 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 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 15.3. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) of $92.20 is default based on low EPS of $8.38/share. This is 20.5% less than the previous close and 8.8% less than the 52-week low.

Since a dividend was first issued in ’16, Payout Ratio ranges from 13.6% in ’21 to 22.6% in ’17. I am forecasting below the range at 13.0%.

These inputs land DG in the HOLD zone with a U/D ratio of 2.5. Total Annualized Return (TAR) is 9.4%.

PAR (using Forecast Average—not High—P/E) of 4.6% is less than the current yield on T-bills. 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 210 studies (my study and 102 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 Payout Ratio are 6.0%, 8.2%, 21.3, 14.4, and 17.9%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 19.0 is higher than MS (17.9) and higher than mine (16.0).

MS high / low EPS are $15.33 / $9.96 versus my $9.28 / $8.38 (per share). Despite mentioning above that my forecast growth rate is not conservative, my EPS range is completely below MS thereby suggesting it may be more conservative than I think. Value Line’s high EPS is $11.80. I am lowest of the three.

MS LSPF of $130.30 (invalid on today’s date) implies a Forecast Low P/E of 13.1: less than the above-stated 14.4. MS LSPF is 9.2% less than the default $9.96/share * 14.4 = $143.42 (also invalid on today’s date), which results in more conservative zoning. MS LSPF is still 41.3% greater than mine.

My TAR (over 15.0% preferred) is much less than MS 21.7%. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG (Zacks) is overvalued at 2.1. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap around 0.6. Kim Butcher’s “quick and dirty DCF” suggests the stock to be 51.0% overvalued with a fair value of: 14.5 * [$15.00 – ($2.68 + $8.40)] = $56.84 [from 2023 10-K, $1.9B projected ’24 Capex / 226.3M diluted shares outstanding = $8.40—and even that is likely less than the 5-year projection].

DG is a BUY under $113. With a forecast high price near $176, TAR should meet my 15% criterion around $88/share.