Dollar General Corp (DG, Financial) experienced a daily loss of -1.01% and a 3-month loss of -24.16%. Despite this downward trend, the company's Earnings Per Share (EPS) stands strong at 10.61. This raises the question: Is Dollar General significantly undervalued? This article seeks to answer this question by conducting an in-depth valuation analysis of the company. Read on to gain valuable insights into Dollar General's intrinsic value.
Introduction to Dollar General Corp (DG, Financial)
Dollar General, a leading American discount retailer, operates over 19,000 stores across 47 states. The company offers a wide array of products, from consumables and seasonal merchandise to home products and apparel. With most of its items sold at everyday low prices of $5 or less, Dollar General has positioned itself as a value retailer. Despite its current stock price of $154.99, the GF Value, an estimation of the fair value, stands at $278.3, suggesting that the stock may be significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates 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, its future return will likely be higher.
Given its current price of $154.99 per share, Dollar General's market cap stands at $34 billion. This, coupled with the GF Value, suggests that the stock is significantly undervalued. As a result, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength of Dollar General
Investing in companies with poor financial strength can result in a higher risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to invest in its stock. A good starting point for understanding a company's financial strength is to look at its cash-to-debt ratio and interest coverage. Dollar General's cash-to-debt ratio is 0.02, which is worse than 94.1% of the companies in the Retail - Defensive industry. This indicates that Dollar General's financial strength is fair.
Profitability and Growth of Dollar General
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Dollar General has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $38.40 billion and Earnings Per Share (EPS) of $10.61. Its operating margin is 8.65%, which ranks better than 88.2% of the companies in the Retail - Defensive industry. This indicates strong profitability.
Growth is a crucial factor in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Dollar General's 3-year average revenue growth rate is better than 84.03% of the companies in the Retail - Defensive industry. Its 3-year average EBITDA growth rate is 18.1%, which ranks better than 71.26% of the companies in the same industry, indicating strong growth.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Dollar General's ROIC was 10.93, while its WACC came in at 3.93.
Conclusion
In conclusion, the stock of Dollar General appears to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 71.26% of the companies in the Retail - Defensive industry. To learn more about Dollar General stock, you can check out its 30-Year Financials here.
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