Dollar General Stock — 3 Pros, 3 Cons

Will momentum stay on the side of this discount retailer?

   
Dollar General Stock — 3 Pros, 3 Cons

dollar general 630 300x225 Dollar General Stock    3 Pros, 3 ConsThere seems to be no stopping Dollar General (NYSE:DG). In its latest quarter, the discount retailer posted an 11.5% increase in sales to $3.6 billion, and net income rose by 34% to $171 million, or 50 cents per share. Comparable-store sales increased by 6.3%, up from 4.3% in the same period a year ago.

Of course, investors have chalked up some nice gains from Dollar General. During just the past month alone, DG stock is up 16.21%, and for the year it’s up a sizzling 32%.

But it’s never easy keeping up a breakneck pace. So what might investors expect going forward? Let’s take a look at the pros and cons of this stock to decide:

Pros

Attractive business model. Dollar General provides brand-name products — such as Kraft Foods (NYSE:KFT) and Kellogg (NYSE:K) — across more than 9,800 locations in 38 states. The typical store footprint is about 7,200 square feet, and it has a focus on consumables like salty snacks and carbonated beverages. These items help to boost traffic to the stores.

Technology investments. Dollar General wants to benefit from some of the latest innovations, such as cloud computing and mobile systems. To this end, the company has been upgrading its point-of-sale registers and also implementing new software applications to help with things like inventory and task management.

Cash flows. These have come to $604 million for the year, up 50%. Dollar General is focused on finding more efficiencies, such as with cost cuts and improvements in logistics and product sourcing.

Cons

Costs. Commodities inflation remains a problem. The company continues to feel the pressures from price increases across food items like sugar, coffee, nuts and juices. Transportation costs also have been an issue.

Competition. The market is saturated with rivals such as Family Dollar (NYSE:FDO), Dollar Tree (NASDAQ:DLTR) and 99 Cents Only. At the same time, larger companies like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are getting more aggressive on pricing, meaning Dollar General is feeling pressure from every angle.

Valuation. Dollar General’s is pricey, with a price-to-earnings ratio of 20. DG stock also is at an all-time high, and it does not offer a dividend.

Verdict

Dollar General boosted its full-year earnings guidance from $2.22-$2.30 to $2.29-$2.32. The company also expects sales growth to be a healthy 13%.

The secular trends certainly are positive as well. Unemployment and underemployment remain persistently high, and the housing markets continue to be stagnant. The result? A large part of the U.S. population faces significant pressure on discretionary spending.

What’s more, even Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, BRK.B) has invested in shares of Dollar General this year.

In light of the company’s long-term growth prospects and its strong business model, the pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2011/12/dollar-general-dg-stock-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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