Retail
Why Merrill Lynch Now Calls Dollar General a Stock for All Seasons
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After Dollar General Corp.’s (NYSE: DG) analyst day, some analysts are turning increasingly positive on the company. Merrill Lynch in particular is seeing this as a stock for all seasons. Keep in mind 24/7 Wall Street has previously called Dollar General a stock to own for the next decade.
Merrill Lynch upgraded Dollar General to a Buy rating from Neutral with a $100 price target, implying an upside of 20% from the current price level. This upgrade is based on the many achievable comp, margin and capital return/cash flow initiatives in place and the smooth transition of leadership from Rick Dreiling (the architect of the modern Dollar General) to Todd Vasos.
With the shares pulling in about 10% in the past month, the brokerage firm sees an attractive entry point and is raised its price objective slightly to $100 to reflect increased confidence in the sustainably of earnings per share growth and possible upside from comp and margin initiatives. Merrill Lynch also sees room for multiple expansion, closer to other high-unit growth, high-quality retailers such as Tractor Supply.
Merrill Lynch believes Dollar General’s initiatives will support continued reinvestment in the business and possible upside. These include:
- Improved category management and shrink
- Greater distribution efficiencies
- Higher penetration of sourced and private label merchandise
- Nonconsumables growth
- Work and process elimination
The firm detailed its investment rationale as follows:
We rate Dollar General Buy as we believe Dollar General offers steady low-risk growth with an outside square footage opportunity that is supported by a strong balance sheet and capital return. We expect industry fundamentals to remain supportive, believe Dollar General has ample room to grow market share and are positive on Dollar General’s comp, margin and capital return initiatives which we see as achievable and could provide upside to long term targets.
Shares of Dollar General were trading up 0.7% at $83.49 on Wednesday, with a consensus analyst price target of $94.14 and a 52-week trading range of $59.75 to $87.42.
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