Valuations: Comparing Dollar General to Peer Stocks
A look at valuations
After being relisted in 2009, Dollar General’s (DG) stock has traded at an average PE (price-to-earnings) multiple of 18.5x. Currently, the retailer is trading at 15.4x, closer to the lower end of its 52-week PE range of 14.3x to 20.3x. The discount retailer’s short-term negative outlook is the key reason behind its low valuations.
As we discussed in Part 11 of this series, the company’s management has forecasted a decline of around 2% (the midpoint of the $4.25–$4.50 expectation range) in the company’s earnings per share in fiscal 2017. This fall compares to its long-term goal of growing earnings in the 10%–15% range. Wall Street expects a 0.7% decline in the company’s earnings next year.
Dollar Tree (DLTR), the retailer’s closest comparable, trades at 17 times earnings. The company has a stronger near-term outlook, and its earnings are predicted to grow by 18% during the next fiscal year.
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Big box retailers Walmart (WMT) and Costco (WMT) also trade at a premium to Dollar General. The two companies are valued at 17x and 28x, respectively. Target (TGT), however, trades at a discount to others and is valued at 13.3x.
Looking at return on equity
Return on equity (or ROE) is an indicator of efficiency and is calculated by dividing net income by shareholder equity. Companies that trade at low price-to-earnings multiples and offer a high return on equity can be considered good investment candidates.
Dollar General has a ROE of 23%, better than Dollar Tree (18.3%), Walmart (17%), Costco (20.3%), and Target (22.3%). As we discussed, it trades at a discount to most peers.
It seems that the company’s near-term weak outlook is already priced into its stock price. Low current valuations with high ROE can, therefore, be considered a good entry point into the company.
Investors looking for exposure to Dollar General through ETFs can consider the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ), which invests 3.6% of its total holdings in the company.