DG Surges 3.2%. Let's Take a Closer Look at its Valuation.

Department Store company Dollar General is standing out today, surging to $114.7 and marking a 3.2% change. In comparison the S&P 500 moved only 1.0%. DG is -15.96% below its average analyst target price of $136.49, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Dollar General has underperfomed the S&P 500 by 71.0%, moving -51.0%.

Dollar General Corporation, a discount retailer, provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

Dollar General's trailing 12 month P/E ratio is 11.8, based on its trailing EPS of $9.76. The company has a forward P/E ratio of 14.7 according to its forward EPS of $7.79 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Dollar General's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -2.81. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing DG's growth potential .

To gauge the health of Dollar General's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.

DG's gross profit margins have averaged 31.2% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -0.2%.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Dollar General's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2022-03-18 2,865,811 -1,065,557 3,931,368 -19.79
2021-03-19 3,876,159 -1,024,910 4,901,069 62.26
2020-03-19 2,237,998 -782,485 3,020,483 5.05
2019-03-22 2,143,550 -731,603 2,875,153 17.49
2018-03-23 1,802,108 -645,028 2,447,136 13.5
2017-03-24 1,605,041 -550,936 2,155,977
  • Average free cash flow: $3.22 Billion
  • Average free cash flown growth rate: 0.0 %
  • Coefficient of variability (the lower the better): 7808814801.1 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in DG have received an annualized dividend yield of 2.1% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Dollar General's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.

Dollar General is by most measures fairly valued because it has a very low P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend. The stock has strong growth indicators because it has a an average PEG ratio and strong margins with a stable trend. We hope you enjoyed this overview of DG's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.