One Reason To Buy Dollar General Stock That You May Not Hear On The Earnings Call

Published on

When It Comes To Weathering Inflation, Location Matters

Dollar General (NYSE:DG) is expected to report earnings on March 17 before the market opens. The expectation is for the company to deliver earnings per share of $2.57. Topline revenue is projected to come in at around $8.6 billion.

This is painting a somewhat bearish picture for investors. If the numbers hold, the company would be posting a 4% year-over-year (YOY) decline in earnings and only about a 1% YOY increase in revenue. Dollar stores have been a key lifeline for many low- and middle-income families over the last few years.

Get The Full Walter Schloss Series in PDF

Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2021 hedge fund letters, conferences and more

In 2020, consumers were dealing with the pandemic. Then in 2021, they were dealing with the effects of inflation. And dollar stores were able to hold the line. But that appears to be changing. On March 10, the Bureau of Labor Statistics reported a 7.9% inflation rate in February. Drilling into the details of that report, grocery costs at dollar stores were up 14.3% from 2021 and 22.5% from 2020 levels.

And the analysts tracked by MarketBeat are giving DG stock a consensus buy rating. However, in the last two months, the company has received several downgrades. As of this writing, analysts give the stock an upside of approximately 10%.

What Analysts May Not Hear Tomorrow

A 10% gain would certainly be better than how the broader market is performing. But it may not be enough to convince investors to part with cash they have on their sideline. However, there is one potential growth catalyst that analysts may be overlooking. Like real estate, location matters.

One of the strategic benefits of Dollar General’s  16,000 store footprint is their focus on less densely populated areas. During the pandemic, this was a benefit because consumers were looking for local shopping options. That is a dynamic that is likely to remain in place.

While there’s no doubt that consumers are feeling the effects of inflation at the grocery store, they are also acutely feeling it at the gas pump. That will likely mean that a local dollar store may generate more traffic than “destination” shopping locations. Compared to 2019, traffic at Dollar General is up 28.2%.

And to add more credibility to this option, consider that 59% of dollar store shoppers earn less than $50,000 a year. Inflation is hitting these families the hardest and dollar stores often sell food in smaller quantities than traditional grocery chains. This can help families buy one meal at a time as their budget allows.

And another important pillar in the company’s growth strategy has been to build out its digital strategy. This includes a partnership with DoorDash to offer same-day delivery. This will allow dollar stores to more effectively compete with larger retailers.

Is More of the Same Enough?

DG stock is up 11% in the last 12 months. That’s approximately the same level of growth that analysts are forecasting for the next 12 months. However, the stock is also down 10% from its 52-week high so how investors feel about Dollar General may depend on when they bought the stock.

But should you buy the stock now? Depending on the metric you prefer, the stock may look undervalued or overvalued. For example, the company’s PEG ratio suggests the stock is attractively priced and it has a lower debt level than its peers. But its P/E ratio suggests a higher valuation.

And while the company’s dividend yield is under 1% (0.78%), it does pay a $1.68 per share dividend on an annual basis. Plus, the company has increased its dividend in each of the last six years.

Is that enough for you? Only you can answer that. But at a time when investors are looking for any growth they can get, you could do worse than buying some shares of DG stock.

Should you invest $1,000 in Dollar General right now?

Before you consider Dollar General, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Dollar General wasn't on the list.

While Dollar General currently has a "Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

Article by Chris Markoch, MarketBeat