May 26, 2022
[6 min Read]
Dollar General Corporation, a discount retailer, provides various merchandise products in the southern, southwestern, Midwestern, and eastern United States. It offers consumable products, including paper and cleaning products, such as paper towels, bath tissues, paper dinnerware, trash and storage bags, disinfectants, and laundry products; packaged food comprising cereals, pasta, canned soups, fruits and vegetables, condiments, spices, sugar, and flour; and perishables.
In order to undergo a comparable analysis (to determine DG stocks value), we need to first outline who DG's competitors are.
These competitors need to be publicly listed, have valid financial metrics/multiples, operate in a similar manner to DG, and have a market cap similar to DG (if possible).
By keeping this in mind, I found the following list of companies to be some of DG stocks closest competitors:
KDP, KMB, STZ-B, STZ, GIS, SYY, ABEV, HSY, CL, ADM
DG recently released their Q1 2022 financial report. This report was fantastic as they beat their EPS estimates by $0.10 and increased their guidance for the rest of the year. To read more about DG's Q1 2022 financial report, you can do so here.
Overall, DG had a slightly poor 2021 financial performance. However, has their recent performance been enough to bring this back?
Overall, it seems as though DG had a better financial performance (due to EPS beat of $0.5) as many of their financial metrics grew, most notably their EPS (by $0.5), as well as their net income (by $110.4M), and other metrics (as you can tell from the above bullet points).
As part of their Q4 2022 earnings release, DG stated that they currently have 231.08M Shares Outstanding (weighted average), which is down -1.41M shares (from 232.49M shares outstanding in Q3 2022). This is great to see as an investor as your shares will increase in value the longer you are holding.
Furthermore, DG stock has up to 1.53M of shares that they can issue (thereby diluting DG's stock). This maximum dilution for the period would only have a dilutionary effect on DG of 0.62%, this is essentiaally negligable, and in the worst case will offset the shares DG bought back throughout the year.
Here is the current analyst rating distribution for DG. In total there are 29 DG stock analyst ratings.
Analyst Ratings have provided relatively strong indicators of future price movement, which is why they are used to determine if DG stock is a buy or sell
Currently, we have 3 financial ratings that help investors get a general idea of a company's valuation. These 3 metrics include DCF, ROE, and P/E, which are very common in the investing/valuation climate.
Firstly, DG stock has a DCF rating of 5 - Very Strong. DCF ratings determine the value behind a company based on their financial projections, expectations, and discount rate (time value of money). This is one of the most used valuation models in the stock market, and thus a high level of importance should be associated with this rating.
Secondly, DG stock has an ROE rating of 3 - Neutral. DG's current ROE is 38.64%, which justifies their rank of 3 - Neutral. ROE shows us how good (or bad) a company is at using their shareholders funds to generate money (returns). ROE is most useful when compared against the industry average, which is currently 56.62%.
Lastly, DG stock has a P/E rating of 5 - Very Strong. DG stock price to earnings ratio is currently 19.27 which justifies their rank of 5 - Very Strong. Price to Earnings is the most commonly found financial metric and is best used when comparing a company's p/e to the industry average. DG operates in the Discount Stores industry, which currently has an average P/E of -104.86.
Overall, based on the 3 previously mentioned fields, DG stock has been given a comprehensive rating of 5 - Very Strong. This rating implies that they are very healthy financially.
As we know, DG stock has been given an overall rating of 5 - Very Strong. This implies that DG is sound fundamentally and is a good candidate for being “undervalued”. With this in mind, let's proceed.
Overall, DG stock is overvalued and needs to experience a change in stock price of (an average of) 97.53% to be considered “at fair value”.
Overall, due to the overall stock rating of 5 - Very Strong (Based off of DCF, ROE, and P/E), as well as the fact that a comparable analysis (P/E and P/B) found that DG was overvalued and need to experience a price change of 97.53% in order to be at their fair value, I have concluded the following:
I think that DG is definitely undervalued, and seems to be financially healthy. As a result, it would be worth looking into the DG stock for yourself to determine if it is a suitable investment for you.