To The Moon

$Dollar General(DG)$

Dollar General Corp (ticker symbol DG) is currently trading around $79 per share, which represents a significant drop from its previous price of around $68 per share. Over the past year, the stock has steadily declined by roughly 20%. Following disappointing earnings and guidance, the stock experienced an additional 35% drop. Despite this, Dollar General has a relatively low price-to-earnings (P/E) ratio of around 12 and offers a dividend yield of 3.05%, making it attractive to dividend investors. The key question is whether this is the right time to buy.

To answer this, we'll analyze Dollar General's financials using several valuation models: the discounted free cash flow (DCF) model, the comparable company model, the dividend discount model, and the Ben Graham intrinsic value formula.

Earning Overview

Dollar General's Q3 2024 earnings results show a mixed performance with notable challenges and some growth. The company reported earnings per share (EPS) of $0.89, missing analysts' consensus estimate of $0.97 by $0.08. This figure reflects a decline from $1.26 in the same period the previous year. However, revenue increased by 5% to $10.18 billion, surpassing expectations of $10.14 billion due to positive sales momentum despite economic headwinds and increased costs​.

Revenue is at an all-time high of $39.45 billion, although growth has slowed in recent years, partly due to external factors like the pandemic. Profits have dropped, with a current figure of $1.42 billion, which is a significant decline from the 2021 peak.

Guidance

Looking forward, Dollar General adjusted its guidance for FY 2024, projecting EPS between $5.50 and $5.90 and net sales growth of 4.8% to 5.1%.

The company plans to open 730 new stores and continue its expansion strategy to support long-term growth.

International Expansion: Dollar General is expanding beyond the U.S., including plans to open stores in Mexico. Strategic Focus Areas Cost Control, Efforts to mitigate higher labor and inventory costs through improved efficiency

Risk & Challenges

Key challenges included higher selling, general, and administrative (SG&A) expenses, which rose to 25.7% of net sales from 24.5% the year prior. Factors contributing to this included hurricane-related costs and increased labor expenses​. , same-store sales saw a slight decline of 1.3%.

Inventory Shrinkage: The company continues to struggle with inventory shrink, a common issue for many retailers, which has eroded profits.

Labor Expenses: Higher wages and labor-related costs have contributed to rising SG&A (Selling, General, and Administrative) expenses, which increased to 25.7% of net sales compared to 24.5% a year ago.

Higher Effective Tax Rate: The company's effective income tax rate increased from 21.3% to 23.2%, further squeezing net income​.

Free cash flow

free cash flow is around $1.69 billion, showing a similar decline. While operating cash flow is increasing, capital expenditures (capex) have also risen, leading to a mixed picture for cash flow sustainability. The company has a dividend yield of 3.05%, meaning shareholders are paid approximately $2.36 per share annually. They pay out about half a billion dollars in dividends, and the payout ratio is conservative at 36% of net income and 30% of free cash flow.

Technical Analysis

Starting with the basics, Dollar General's market cap stands at $16.8 billion, with earnings per share (EPS) of $6.44 and a beta of 0.5, indicating lower volatility compared to the market. Analysts have a "buy" recommendation for the stock, with a target price of around $95 per share.

Dollar General's (DG) recent technical analysis indicates a challenging period for the stock. The stock is experiencing a bearish trend, with its price hovering near 52-week lows between $73 and $81. Both short-term and long-term signals suggest a "sell" sentiment

Support and Resistance levels are critical to watch. Immediate support lies near $72, while resistance levels are set around $90 and $110. A breach below current levels could push DG stock toward deeper declines, but a sustained rally above resistance could signal recovery.

Valuation

Looking at valuation models, the DCF model calculates a stock price of $700 per share with a weighted average cost of capital (WACC) of 4%, suggesting the stock is currently undervalued. Adjusting the WACC to a more typical 8% brings the calculated price down to $128 per share, still indicating significant upside potential. The dividend discount model also values the stock at $90 per share, assuming consistent dividend growth.

The Ben Graham formula gives an intrinsic value of $84 per share, with a margin of safety indicating the stock is somewhat undervalued. The comparable company model, which compares Dollar General to peers like Walmart and Costco, shows that Dollar General has the lowest price-to-sales and price-to-book ratios, making it look undervalued relative to these larger players.

Conclusion

Multiple models indicate that Dollar General is a buy at its current price of $77, with a target price range between $84 and $128 per share. However, there may be some short-term volatility as the result of earnings reports is not good.