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CVS (CVS) appears to be downplaying its tobacco exit, and investors have looked past it, suggesting it could be a long-term positive for the company. The stock is also holding up relatively well. Meanwhile, the market is pointing to Walgreen (WAG) as one of the big benefactors to CVS' decision. Walgreen is up over 10% year to date, while CVS is down on the year.

However, what will turn out to be one of the biggest winners of CVS's move to stop selling tobacco is Dollar General (DG), the nation's top dollar store company by locations. The reason for this is that CVS and Dollar General have a rather large geographical overlap. About 50% of CVS' stores are located in the Southeast and Midwest parts of the U.S. Meanwhile, those same two regions account for 75% of Dollar General's store count. This means there is a rather large opportunity for Dollar General to gain tobacco sales from CVS.

How big is DG's tobacco opportunity?

CVS' move to stop selling tobacco products will go into effect in October. CVS believes it will lose some $2 billion in revenue annually -- a big opportunity for the other companies still selling tobacco. If Walgreen follows suit, which has been speculated, with removing tobacco from its stores, that would be even more potential gains for Dollar General.

Granted I think Family Dollar, Walgreen and convenience stores will also be winners. But with its strong overlap in major markets, I'd expect Dollar General to be the biggest winner. However, analysts have given no credit to Dollar General. They still expect fiscal 2015 EPS to come in at $3.73. Assuming that Dollar General can capture 30% of CVS' lost revenue, that could add upwards of $0.10 to fiscal 2015 EPS, putting estimates up to $3.83.

Dollar General introduced tobacco products over a year ago and has been seeing marked success, with same-store sales growing nicely over that period. Dollar General is also making strides in other areas to help fuel future growth. This includes focusing on consumables by rolling out cooler facilities to offer various perishable items.

Regardless, DG appears to be a top investment

During its fiscal 3Q earnings call back in December, Dollar General noted that November and December would be lumpy given the weather and shorter holiday shopping season. This put some pressure on the stock. The retailer is down from its all-time highs of close to $63 earlier this year, but it should manage to set new highs in 2014 with the help of share gains from CVS.

Beyond that, I look for more consumers to frequent dollar stores for the first half of the year as they feel the effects of the higher heating bills given the severe weather. Granted, the company's results will be even lumpier for January and the first part of February given the lower traffic due to the fact that people can't get to the stores. However, I believe the pent up demand and continued trade down will outweigh the lower traffic.

Dollar General has also been resilient in returning cash to shareholders. During fiscal 3Q, it bought back back 3.5 million shares for $200 million. Since it put its share buyback program in place at the end of 2011, Dollar General has bought up 27 million shares for $1.3 billion. It also recently authorized an additional $1 billion buyback program, putting its total authorization of $1.2 billion (over 6.5% of outstanding shares).

Bottom line

Assuming Dollar General can capture just a portion of CVS' tobacco sales, that'll drive earnings higher than expected. Using its historical average 20 times price to earnings multiple on fiscal 2015 earnings per share of $3.73 suggests the stock should be trading close to $75 in just under a year -- around 30% upside from current trading levels.

We don't really need multiple expansion to see upside either. Again, we'd expect fiscal 2015 EPS to come in around $3.83. Using its current 18.5x price to earnings multiple, Dollar General's price target is $70.

Source: Why Walgreen Won't Be The Biggest Benefactor Of CVS' Shunning Of Tobacco