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Dollar General Corporation (NYSE:DG) operates as a discount retailer primarily in the southern, southwestern, midwestern, and eastern United States. The company provides paper and cleaning products and other home cleaning supplies; packaged food and perishables; over-the-counter medicines and personal care products; and pet supplies and pet food products.

It is scheduled to report its Q1 FY2012 results on June 4, 2012, after the bell.

Recent EPS Actuals vs. Estimates

The company has met or exceeded analyst estimates in three out of four last quarters. In the last quarter it reported $0.87 EPS, beating analysts' estimates of $0.82 EPS (6.1% surprise).

Analyst Estimates

The consensus for EPS is $0.60 based on 23 analysts' estimates, up from $0.48 a year ago. Revenue estimates are $3.82B, up from $3.45B a year ago. The median target price by analysts for the stock is $54.

Average recommendation: Overweight

DG Recommendations

Source: Marketwatch

Analyst Upgrades and Downgrades

During the last 30 days, there were 3 analysts who revised current quarter and year EPS upwards and 1 analyst who revised next quarter and year EPS upward. Also, on May 25, 2012, Nomura reaffirmed a Buy rating for the company. On March 22, 2012, MKM Partners upgraded the stock from Neutral to Buy.

Key Metrics

  • Market cap: $16.42B
  • 52 week trading range: 29.84 - 48.76
  • Trailing P/E: 21.87
  • Forward P/E: 14.99
  • P/S: 1.11
  • P/B: 3.52
  • PEG Ratio: 1.06
  • Annual dividend yield: N/A
  • Total debt: $2.63B
  • Return on Equity: 17.58%
  • Return on Assets: 9.78%

Fair Value Calculations

I will run you through my DCF model to get the fair value of equity. In particular I will be using free cash flow to the firm FCFF model to evaluate the stock. Feel free to share your opinion regarding the assumptions I made for this valuation.

Let's start with the top line. The company recorded $14.81B revenue in FY2012, which represented 13.6% growth Year/Year. In FY2011 revenue grew by 10.5% compared with 2010. In FY2013, however, I predict that the company will record 8.33% higher revenue at $16.04B revenue, and continue to grow 9.1% in 2014. I predict 5% growth for the next 4 years.

Coming down to the cost side I predict COGS 66.5%, SG&A 21.5% and EBIT margin 10% of revenue for the projected period. Interest expense should stay at around 7% of the long-term debt. I forecast taxes to be 35% on average for the projected period.

Then I subtract increases in working capital and capital expenditures. I model working capital to increase 10% of the revenue increase per annum. Capital expenditures should stay at 60% of the net income.

I will use 10% WACC rate to discount future cash flows to present.

To get the value of the firm we need to discount the projected FCFF by WACC and add the terminal value at the end of the 5-year period by calculating a perpetuity with the growth of 2% and 10% WACC.

I get the value of equity by subtracting the market value of debt and adding back current cash and marketable securities.

Fair value per share is $28.02 with the assumptions I made, which means the stock is more than 38% overvalued. It looks like the market believes that the company will grow much more than my assumptions.

Latest Developments

  • On May 10, 2012, The Dollar General Literacy Foundation today awarded more than $6.4 million in grants to 593 nonprofit organizations, libraries and schools.
  • On March 30, 2012, Dollar General Corporation announces the opening of its 10,000th store, giving the retailer a coast-to-coast presence for the first time in the company's history.
  • On March 27, 2012, Dollar General Corp. announced the pricing of an underwritten secondary public offering of 25.0 million common shares at a price to the public of $45.25 per share.
  • On March 22, 2012, Dollar General Corp. issues FY 2012 guidance; revenue above analysts' estimates.

Insider Trading

In the last 3 months there were 94,681,947 shares sold by insiders and 519,327 shares bought by insiders. The majority of the shares sold was by Kohlberg Kravis Roberts & Co and Goldman Sachs on April 2, 2012. Since then, however, the stock price was only pushing up.

Competitors

Dollar General operates in Discount, Variety Stores industry. The company could be compared to Dollar Tree, Inc. (NASDAQ:DLTR), Family Dollar Stores, Inc. (NYSE:FDO), Macy's Inc (NYSE:M), J.C. Penney Company Inc (NYSE:JCP) and some others. Below is the table comparison of the most important ratios between these companies and the industry.

RatioDGDLTRFDOMJCPIND
Market cap16.42B11.91B7.83B15.88B5.90B9.74B
Revenue14.81B6.81B8.89B26.66B16.47B14.81B
Gross Margin31.73%35.84%35.08%40.32%35.27%28.94%
Operating Margin10.16%11.89%7.56%9.18%1.00%5.65%
P/E21.8724.3519.7412.54N/A23.58
PEG1.061.161.260.870.751.26
P/S1.111.750.880.600.361.26
Div yield--1.20%2.10%2.90%-

Here are the latest developments on the named competitors:

  • On May 17, 2012, Dollar Tree, Inc. issues Q2 2012 guidance; raises FY 2012 guidance.
  • On May 15, 2012, J.C. Penney Company Inc reaffirms FY 2012 EPS guidance.
  • On May 10, 2012, NetSpend Holdings Inc announced that it has entered into a distribution agreement to sell the NetSpend Visa Prepaid Debit Card at Family Dollar Stores, Inc. locations nationwide.
  • On May 9, 2012, Macy's Inc reaffirms FY 2012 same-store sales guidance; reaffirms FY 2012 EPS guidance.
  • On April 6, 2012, Reuters reported that J.C. Penney Co Inc laid off about 1000 employees at its headquarters in Plano, Texas and Pittsburgh customer call center, as part of its previously announced cost cutting measures.
  • On March 28, 2012, Family Dollar Stores, Inc. raises low end of prior FY 2012 EPS guidance to a range in line with analysts' estimates.

Technical Insight

The stock is trading above all 21-, 50- and 200-week and day moving averages and at 52 week highs. It has tested 50-day moving average a few times already, but the price keeps pushing up.

Sources: Yahoo Finance, Google Finance, CNBC, Marketwatch, Reuters, Forbes.

Source: Earnings Preview: Dollar General Reports Monday