Wal-Mart Vs. Dollar General: Which Is The Better Buy?

Includes: DG, WMT
by: Karin Hernandez

In the past few years, cash-strapped customers have turned to dollar stores and Wal-Mart Stores, Inc. (NYSE:WMT) in droves, seeking bargains. Dollar General Corporation (NYSE:DG), the largest chain of dollar stores, has been putting forth some excellent growth numbers. Both companies are benefiting from the country's current economic situation... but which is the better buy right now?

In my analysis, I tend to rely heavily on analyst opinion and estimates. I figure they have been studying the stock for a while and probably have a better handle on the numbers than I do. I do look at current news, as well, but I like to lean more on the numbers to provide an objective recommendation.

Wal-Mart is currently trading at about $65, slightly off its 52-week high of $66.66 reached last week. It has a PE of 14.1 and pays a 2.4% dividend. The current analyst rating is a 2.4 (1.0 = Strong Buy, 5.0 = Sell), with a mean target price of $65.56. There are 6 Strong Buy recommendations, 14 Buys, 17 Holds, and 1 Underperform.

The fiscal-year 2012 consensus earnings estimate is $4.91, which is 9% lower than the actual 2011 earnings of $4.49. The estimate for fiscal-year 2013 is $5.34, 9% higher than 2012. The stock is up 11% year-to-date, and up 22% from this time last year. The current estimated annual growth rate for the next 5 years is 8.30%, compared to an industry average of 13.56% and a sector average of 15.28%.

Dollar General is trading at approximately $48 per share, slightly off its 52-week high of $49.50, also reached last week. It has a PE of 21.9 and pays no dividend. Currently, analysts rate it a 1.8 (10 Strong Buys, 7 Buys, and 6 Holds), with a mean target price of $52.76.

Dollar General's fiscal-year consensus earnings estimate is 2.76, 16% higher than actual 2011 earnings. Its estimate for fiscal-year 2013 is $3.24, 17% higher than 2012. The stock is up 18% since the beginning of 2012, and up 39% from a year ago. The current 5-year annual growth is estimated at 16.57% vs the S&P at 10.41%.

Wal-Mart reported earnings that beat analyst expectations in six of the last eight quarters, and the odds are it will do it again when it next reports in August. The company recently also announced a 21% increase in the dividend.

Dollar General just reported better-than-expected 1Q earnings, but analysts were quick to jump on the fact that it did not raise full-year guidance. I suspect that it is playing more conservatively than necessary, as the economic environment that is fueling its growth is not getting better in any rapid fashion.

Eventually, however, I go back to the numbers. With Wal-Mart's current PE and year-end 2013 earnings estimate, I see a stock price of $75, or an upside of 15%. Dollar General's PE and earnings estimate leads to a stock price of $70, or 45% upside.

Buy Dollar General. And maybe shop there for great bargains!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.