Dollar General (DG) stock climbed 1.8 % this afternoon. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put Dollar General's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.
Dollar General Corporation, a discount retailer, provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. The large-cap Consumer Discretionary company is based in Goodlettsville, United States and has 170,000 full time employees.
DG's P/E Ratio Is Better Than the Sector Average
Compared to the Consumer Discretionary sector's average of 22.33, Dollar General has a trailing twelve month price to earnings (P/E) ratio of 15.4 and an expected P/E ratio of 14.9. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $10.6 and $10.96 respectively.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Dollar General's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.
Dollar General Is Overvalued in Terms of Expected Growth
Dollar General's PEG ratio is 3.05. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Dollar General's case, it tells us the company is overvalued.
DG Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Dollar General's P/B ratio of 6.04 is higher than its sector average of 3.12, such a margin of safety does not exist for the stock.
DG Is Generating Cash
Dollar General has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of -3.0%, compared to 18.7% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -26.5% and a coefficient of variability of 61.3%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 1,984,555 | -1,560,582 | 423,973 | -76.38 |
| 2022-01-31 | 2,865,811 | -1,070,460 | 1,795,351 | -36.97 |
| 2021-01-31 | 3,876,159 | -1,027,963 | 2,848,196 | 96.0 |
| 2020-01-31 | 2,237,998 | -784,843 | 1,453,155 | n/a |
Dollar General's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Dollar General's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Dollar General's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 37,844,863 | 26,024,765 | 31.23 | -1.17 |
| 2022-01-31 | 34,220,449 | 23,407,443 | 31.6 | -0.5 |
| 2021-01-31 | 33,746,839 | 23,027,977 | 31.76 | 3.82 |
| 2020-01-31 | 27,753,973 | 19,264,912 | 30.59 | n/a |
Dollar General's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 37,844,863 | 8,491,796 | 8.79 | -6.59 |
| 2022-01-31 | 34,220,449 | 7,592,331 | 9.41 | -10.64 |
| 2021-01-31 | 33,746,839 | 7,164,097 | 10.53 | 26.87 |
| 2020-01-31 | 27,753,973 | 6,186,757 | 8.3 | n/a |
Dollar General's cost of revenue is growing at a rate of 7.8% in contrast to 8.2% for operating expenses. Sales revenues, on the other hand, have experienced a 8.1% growth rate. As a result, the average gross margins growth is 0.5 and the average operating margins growth rate is 1.4, with coefficients of variability of 1.7% and 10.4% respectively.
We See Mixed Market Signals Regarding DG
Dollar General has an average rating of buy and target prices ranging from $230.0 to $155.0. At its current price of $163.44, the company is trading -12.3% away from its target price of $186.37. 2.0% of the company's shares are linked to short positions, and 92.7% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Blackrock Inc. | 8% | 18,595,309 | $3,039,217,348 |
| 2023-06-30 | Vanguard Group Inc | 8% | 18,254,014 | $2,983,436,092 |
| 2023-06-30 | Capital International Investors | 7% | 15,087,855 | $2,465,959,058 |
| 2023-06-30 | Capital World Investors | 5% | 10,787,703 | $1,763,142,204 |
| 2023-06-30 | State Street Corporation | 4% | 9,737,232 | $1,591,453,221 |
| 2023-06-30 | Price (T.Rowe) Associates Inc | 3% | 6,742,407 | $1,101,979,016 |
| 2023-06-30 | JP Morgan Chase & Company | 2% | 5,147,994 | $841,388,151 |
| 2023-06-30 | Geode Capital Management, LLC | 2% | 4,214,491 | $688,816,419 |
| 2023-06-30 | FMR, LLC | 2% | 4,109,097 | $671,590,823 |
| 2023-06-30 | Morgan Stanley | 2% | 3,968,116 | $648,548,888 |
