After getting pounded in its second-quarter earnings report, Dollar General Corp. (NYSE:DG) is looking to bounce back in the third quarter. The company is set to enter the earnings limelight ahead of the open this Thursday, and Wall Street is looking for a return to form for the company. What’s more, with DG stock pinned beneath key overhead resistance, Dollar General stock’s reaction here could make or break the shares.
Heading into Thursday’s report, Wall Street is expecting earnings growth of 5.7% year-over-year to 93 cents per share. Total sales, meanwhile, are expected to rise 6% to $5.37 billion. What’s more, expectations could be even higher, with EarningsWhispers.com projecting a whisper number of 94 cents per share — a penny better than the consensus.
Excessive bullish sentiment may have been at least partly to blame for BD stock’s prior earnings sell-off, so it’s a welcome sight to see that expectations have come down considerably since August.
For instance, Thomson/First Call data reveals that 13 of the 28 analysts following Dollar General stock rate it a “buy” or better, compared to some 19 “buy” ratings back in August. The 12-month price target has moderated as well, dropping to $92.96 from $99.71 heading into Dollar General’s second-quarter report.
Click to Enlarge Turning to the options pits, speculative DG stock traders remain just as skeptical as they did back in August. Currently, the December put/call open interest ratio for Dollar General comes in at 1.18, up slightly from August’s reading of 1.08. This ratio slip 0.94 for the weekly Dec. 2 series.
Overall, weekly Dec. 2 series implieds are pricing in a potential post-earnings move of about 6.9% for DG stock. This places the upper bound at $83.91 and the lower bound at $73.09.
The upper bound lies north of key resistance in the $82 region, which is home to Dollar General’s 200-day moving average and its gap lower in August, while the lower bound is well north of the stock’s recent lows.
2 Trades for DG Stock
Call Spread: While a post-earnings selloff is certainly a possibility, Dollar General still has a history of moving higher following quarterly earnings reports — last quarter notwithstanding. Add to this the fact that expectations have come down from their lofty second-quarter levels, and the potential for a post-earnings rally is increased. As such, traders looking to bet on a DG stock rally might want to consider a Dec $79/$80 bull call spread.
At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $80.18, while a maximum profit of 82 cents, or $82 per pair of contracts, is possible if DG closes at or above $80 when December options expire.
Put Sell: On the other hand, overhead resistance is considerable, and DG stock is trading in overbought territory, potentially limiting any post-earnings rally. As such, traders might consider a weekly Dec. 2 series $70 put sell position to take advantage of technical support. At last check, the Dec $70 put was bid at 43 cents, or $43 per contract.
The upside to this put sell strategy is that you keep the premium as long as DG stock closes above $70 when these options expire at the end of this week. The downside is that should DG trade below $70 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $70 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
