Options Trade – Dollar General (DG) Calls

As Dollar General expands with more stores, bullish earnings seem likely

   

Discount retailers have been among the best performers during the recent recession and they have remained strong even as the economy has improved. Dollar General (DG) is the nation’s largest dollar store chain by market cap, and as of May was operating over 10,662 stores. The economy has been improving, and over the past few years, the company’s annual earnings per share have also improved, rising from $0.47 in 2009, to $2.91 last year, with the company reporting record sales and income during its most recent quarter.

Dollar General will report its second quarter results before the market opens on Wednesday, September 4, and the expectation is for another strong quarter. Going into the company’s quarterly report, analysts expect earnings of $0.76 per share, up from $0.65 during the same period last year. The stock is up 25.75% thus far in 2013.

9 3 13 dg1 Options Trade – Dollar General (DG) Calls

Technical Analysis is Encouraging

Shares of Dollar General Corp. opened at 53.97 on Tuesday and though it’s been trading down today, long-term it is showing definite bullish signs. Dollar General Corp. has a one year low of $39.73 and a one year high of $56.10. The stock has a 50-day moving average of $54.28 and a 200-day moving average of $51.57.

The company has a market cap of $17.69 billion and trades at 18.65 times trailing earnings, and has a forward P/E of 14.46 which looks quite attractive, as does its 19.64% return on equity. Gross margin of around 32% is on par with the industry. Finally, the trailing-12-month operating cash flow of $1.09 billion is well ahead of the competition.

Earnings Effects and Moving Forward

Last quarter, Dollar General disappointed investors with earnings that only matched expectations, and guidance that pointed analysts toward the lower end of the company’s previous ranges for earnings and revenue.

9 3 13 earningsdg Options Trade – Dollar General (DG) Calls

Last quarter’s setback hasn’t stopped Dollar General’s resolve. It’s still looking to increase its reach across the industry with a big expansion plan that includes opening more than 600 stores this year.

The company has made gains of more than 30% in sales per store over the past five years, and so boosting its store count seems like a natural way to take advantage of clear demand for its products. Moreover, more disciplined use of pricing discounts led to Dollar General earnings an analyst upgrade earlier this month, sending the stock higher.

Analysts Back Dollar General

Dollar General has been the subject of a number of recent research reports.

9 3 13 analystdg Options Trade – Dollar General (DG) CallsAnalysts at Deutsche Bank raised their price target on shares of Dollar General from $56.00 to $62.00, with a “buy” rating on Monday, August 26. JPMorgan Chase & Co. (JPM) upgraded shares of Dollar General from a “neutral” rating to an “overweight” rating on Monday, August 19. They now have a $64.00 price target on the stock, up previously from $51.00. Finally, analysts at Nomura reiterated a “buy” rating, with a $58.00 price target, on shares of Dollar General on Thursday, August 1.

9 3 13 dgrating Options Trade – Dollar General (DG) Calls

Buy the Profit

Dollar General store sales are going to continue to be boosted due to the fact that not everyone has been able to benefit from the economic recovery in the U.S., as has been reflected in stock market all-time highs and strength in the housing market. Many Americans feel that they are not much better off than they were a few years ago, and consumers are still cautious on spending in part due to the end of a payroll tax cut and weak disposable-income growth.

The discount retail industry is still posting fairly solid growth on the back of continued weak consumer spending. In the industry, Dollar General seems to be delivering the best growth, coupled with a reasonable valuation.

OPTIONS TRADE: Buy the DG Nov 2013 55.000 call (DG131116C00055000) at or under $2.50, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.00.

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