Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Dollar General Corporation DG stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Dollar General has a trailing twelve months PE ratio of 16.9, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20. If we focus on the long-term PE trend, Dollar General’s current PE level puts it below its midpoint of 18.1 over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it could be a great entry point.
Further, the stock’s PE compares favorably with the Zacks Retail-Wholesale sector’s trailing twelve months PE ratio, which stands at 27.3. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Dollar General’s forward PE is roughly same as its trailing twelve months value, so we might say that the forward earnings estimates are incorporated in the company’s share price as of now. We define forward PE as current price relative to the Zacks Consensus Estimate for the current fiscal year.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Dollar General has a P/S ratio of about 0.9. This is way lower than the S&P 500 average, which comes in at 3.1 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
If anything, DG is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Dollar General currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Dollar General a solid choice for value investors.
What About the Stock Overall?
While Dollar General might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of G and a Momentum Score of A. This gives DG a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen three estimates go higher in the past sixty days compared to no downward revisions, while the full year estimate has seen two upward and no downward revisions in the same time period.
This has had a slightly positive impact on the consensus estimate, as the full year estimate has inched higher by 0.5%, while the current quarter consensus estimate has remained unchanged. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Dollar General Corporation Price and Consensus
Dollar General Corporation Price and Consensus | Dollar General Corporation Quote
However, this somewhat bullish trend has likely not yet been reflected in the stock, as we have just a Zacks Rank #3 (Hold), which indicates expectations of in-line performance in the near term.
Dollar General is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, this Zacks Rank #3 company enjoys a solid Zacks Industry Rank (among Top 26% of more than 250 industries). However, owing to a challenging retail landscape and evolving consumer preferences, the industry has underperformed the broader market in the past two years. This is visible from the chart below:
So, value investors might want to wait for the broader industry factors to turn favorable, but once that happens, this stock could be a compelling pick.
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