Dollar General (NYSE:DG) operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. DG has had a nice price run from ~$31 to $40, a 29% gain, in the past year. DG is a growth stock with EPS growth (TTM vs. Prior TTM) of 40% and a projected long-term growth rate of 16%. DG is priced in the neutral to slightly overvalued range with a price/cash flow of 14. The stock is currently trading at $40.28.
Dollar General is in the right price point as a discount retailer in today's market. It is rated neutral by analyst due to its price appreciation over the last year. DG appears normally valued based on its Price/Earnings (NYSE:TTM) of 20.80, which is between the Consumer Discretionary sector's top and bottom quintile values of 21.63 and 12.06, respectively. The neutral ranking and strong market position make DG a good candidate for a covered call trade.
Look at the January 2012 41 covered call. For each 100 shares of Dollar General stock you buy, sell one January 41 covered call option for a 39.18 (40.28 - 1.10) debit or better. That's potentially a 4.65% assigned return. With a small market rally, DG should be capable of hitting the $41.00 strike price by expiration date. The technicals for DG are bearish with a weak upward trend. The stock is under accumulation with support at 38.43. S&P rates this stock 4 STARS (out of five) - buy.
S&P has a buy recommendation on shares of Dollar General. DG reported Oct-Q EPS of $0.50, vs. $0.37, $0.03 higher than consensus from Capital IQ. Results benefited as a decline in outstanding borrowings resulted in a significant reduction in interest expense and as the company leveraged 5.5% same-store sales growth, despite inflationary cost pressures. We expect DG to maintain 7% square footage expansion by utilizing its strong free cash flow generation. S&P raised their FY 12 (Jan.) EPS estimate by $0.02 to $2.32 and raised the 12-month target price by $3 to $45.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.