Despite Dollar General Corp (DG, Financial)'s recent loss of -2.32% on the day and a 3-month loss of -29.71%, the company's Earnings Per Share (EPS) (EPS) stands at 9.76. This raises the question: is Dollar General significantly undervalued? In this article, we will conduct a thorough valuation analysis to answer this question, providing you with valuable insights into the company's financial health and future prospects.
Company Overview
Dollar General Corp (DG, Financial) is a leading American discount retailer, operating over 19,000 stores across 47 states. The company offers a wide variety of branded and private-label products across several categories. In fiscal 2022, 80% of net sales came from consumables, 11% from seasonal merchandise, 6% from home products, and 3% from apparel. Dollar General's stores average roughly 7,500 square feet, and about 75% of its 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.
Despite the current stock price of $112.43, Dollar General's fair value (GF Value) is estimated at $273.84, suggesting that the stock is significantly undervalued. This discrepancy between the stock price and the GF Value provides an opportunity for a deeper examination of the company's intrinsic value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is derived from a unique method that considers historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
According to the GuruFocus Value calculation, Dollar General's stock is significantly undervalued. The GF Value is the estimated fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, past business growth, and analyst estimates of future business performance. If the price of a stock 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 is likely to be higher.
With its current price of $112.43 per share and a market cap of $24.70 billion, Dollar General's stock is believed to be 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
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding to buy its stock. A great starting point for understanding a company's financial strength is looking at its cash-to-debt ratio and interest coverage. Dollar General's cash-to-debt ratio is 0.02, which is worse than 94.14% of 307 companies in the Retail - Defensive industry. GuruFocus ranks Dollar General's overall financial strength at 5 out of 10, indicating fair financial strength.
Profitability and Growth
Companies that have consistently been profitable over the long term offer less risk for investors. Higher profit margins generally dictate a better investment compared to a company with lower profit margins. Dollar General has been profitable 10 years over the past decade. Over the past twelve months, the company had a revenue of $38.80 billion and Earnings Per Share (EPS) of $9.76. Its operating margin is 7.99%, which ranks better than 86.64% of 307 companies in the Retail - Defensive industry. Overall, Dollar General's profitability is ranked 9 out of 10, indicating strong profitability.
Growth is perhaps the most important factor in a company's valuation. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. Dollar General's 3-year average annual revenue growth rate is 15.9%, which ranks better than 83.79% of 290 companies in the Retail - Defensive industry. The 3-year average EBITDA growth rate is 18.1%, which ranks better than 72.2% of 259 companies in the Retail - Defensive industry.
ROIC vs WACC
Another way to assess a company's profitability is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Dollar General's ROIC is 9.92, and its cost of capital is 3.78.
Conclusion
In conclusion, Dollar General's stock is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 72.2% of 259 companies in the Retail - Defensive industry. To learn more about Dollar General's stock, you can check out its 30-Year Financials here.
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