What’s next for Dollar General (NYSE:DG)? The novel coronavirus helped, not hurt, the discount store giant. But, the price of Dollar General stock largely reflects this.
Between earlier bouts of stockpiling and being one of the few chains open during lockdowns, investors know the score and have bid up shares accordingly.
Yet, that doesn’t mean the party’s over. Sure, once other stores reopen, “essential businesses” like this will have less of an advantage. However, if a weak economy continues post-pandemic, expect this defensive stock to be a strong performer.
What’s a defensive stock? These are stocks that perform relatively well in a downturn. Even as households tighten their belts, these kinds of businesses don’t take much of a sales hit. If anything, their sales see a temporary boost.
That’s why our own Josh Enomoto included Dollar General on a recent list of recession-resistant stocks to buy. Even if the economic situation gets worse, the company could win out, as struggling households turn to discounters like this to buy their essentials.
Granted, this isn’t the cheapest dollar-store stock out there. But, considering the company’s strength, and the high forward multiples seen with other major retail stocks, valuation still has room to grow.
Let’s dive in, and see why Dollar General remains a buy. Even as the pandemic enters the rearview mirror.
Tough Times Mean Good Times for Dollar General Stock
Investors buying in earlier this year rode the pandemic windfall. Since February, shares have climbed from around $155 per share to about $182 per share today. And this is after shares pulled back to prices below $140 per share during the epic sell-off in March.
With such strong performance, you may think there’s no more runway left for Dollar General stock to head higher. Not so fast! If anything, now may be the start for further upside in the company’s shares.
That’s the view of analysts such as Goldman Sachs’ Kate McShane. Giving shares a “buy” rating, and a price target of $202 per share, McShane is bullish on dollar stores. As she said in a recent research note:
“We see the dollar stores as well positioned in this uncertain macro economic backdrop. The dollar stores bring a powerful combination of value and convenience to the cash-strapped consumer. Add elements of unit growth, counter-cyclicality and supportive demographics to this mix, and you get attractive business models slated to perform well in the face of a recession.”
Granted, this isn’t any sort of contrarian take. Optimism over continued outperformance of dollar store stocks is in line with market consensus. But, while it’s fun to try to outsmart the crowd, sometimes the trend is your friend.
And that’s the case here. As the U.S. economy remains stuck between a potential swift recovery and extended economic maelstrom, Dollar General is in the catbird’s seat.
Despite Premium to Rival, Multiple Expansion Still Possible
Given investors remain hot on Dollar General stock, it’s no surprise shares command a rich forward multiple. Trading at a forward price-to-earnings ratio of 24, shares look pricey compared to rival Dollar Tree (NASDAQ:DLTR). DLTR stock trades for just 16.5 times forward earnings.
Yet, big box stores like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) trade for slightly higher forward P/E ratios. And discount clubs like Costco (NASDAQ:COST) trade even higher, with a forward P/E of 35.4.
In short, Dollar General looks pricey next to Dollar Tree. But, as seen from the forward P/E ratios of its non-dollar store rivals, multiple expansion could still be in the cards. Combined with analyst consensus calling for 10.3% earnings growth between this fiscal year (ending January 2021) and next, it’s highly possible shares could top $200 per share.
Granted, that’s not exactly high-flying performance. But in today’s uncertain market, this may be a lower risk opportunity, offering a solid potential return in the next year.
DG Stock Could Head Higher
We’ve talked a lot about why this stock could continue to make new highs. But, is there anything that could sink shares in the near-term? Yes and no. If the overall economy appears to be bouncing back quicker than expected, shares could take a breather as investors jump back into higher-risk names.
Yet, a pullback could provide a solid entry point. As InvestorPlace’s Dana Blankenhorn discussed back in March, the company has ample room to expand. The company isn’t dependent on just weak economic times to grow sales. Even if the economy soon is firing on all cylinders again, sales and earnings growth could continue to climb.
With this in mind, Dollar General stock remains a strong opportunity. Consider shares a buy, whatever happens next.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
