On August 25, 2023, Dollar General Corp (DG, Financial) reported a daily gain of 1.81%, despite a 3-month loss of -23.67%. With an Earnings Per Share (EPS) of 10.61, the question arises: is Dollar General significantly undervalued? This article delves into the valuation of Dollar General, providing a comprehensive analysis of its intrinsic value. Stick around to discover if this is the right investment for you.
Company Overview
Dollar General is a leading American discount retailer, operating over 19,000 stores in 47 states. They offer a diverse range of products, from consumables and seasonal merchandise to home products and apparel. The majority of Dollar General's stores are located in towns with a population of 20,000 or fewer, emphasizing their commitment to value with most items sold at everyday low prices of $5 or less. Despite the current stock price of $155.75 per share, the GF Value estimates the fair value to be $278.15, suggesting that Dollar General may be significantly undervalued.
Understanding GF Value
The GF Value is a unique valuation method that estimates a stock's intrinsic value based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
According to this method, Dollar General appears to be significantly undervalued. Given its current share price and a market cap of $34.20 billion, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength can pose a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Dollar General's cash-to-debt ratio of 0.02 ranks worse than 94.3% of 298 companies in the Retail - Defensive industry. However, with an overall financial strength of 5 out of 10, Dollar General's financial health is fair.
Profitability and Growth
Investing in profitable companies carries less risk, especially those with consistent profitability over the long term. Dollar General, having been profitable for 10 years over the past decade, offers promising performance potential. With an operating margin of 8.65%—better than 88.49% of companies in the Retail - Defensive industry—Dollar General's profitability is strong.
Growth is a crucial factor in a company's valuation. Dollar General's 3-year average annual revenue growth rate of 15.9% ranks better than 84.32% of 287 companies in the Retail - Defensive industry. Its 3-year average EBITDA growth rate is 18.1%, which ranks better than 70.87% of 254 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to determine its profitability. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Dollar General's ROIC is 10.93, and its cost of capital is 3.94.
Conclusion
In conclusion, Dollar General appears to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 70.87% of 254 companies in the Retail - Defensive industry. To learn more about Dollar General stock, check out its 30-Year Financials here.
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