Target Corporation (NYSE:TGT) shares are down more than -13.24% this year and recently increased 2.70% or $1.65 to settle at $62.67. Dollar General Corporation (NYSE:DG), on the other hand, is up 23.72% year to date as of 12/13/2017. It currently trades at $91.64 and has returned 0.87% during the past week.
Target Corporation (NYSE:TGT) and Dollar General Corporation (NYSE:DG) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect TGT to grow earnings at a -4.18% annual rate over the next 5 years. Comparatively, DG is expected to grow at a 7.50% annual rate. All else equal, DG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 10.52% for Dollar General Corporation (DG). TGT’s ROI is 15.50% while DG has a ROI of 15.70%. The interpretation is that DG’s business generates a higher return on investment than TGT’s.
The value of a stock is simply the present value of its future free cash flows. TGT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.70. Comparatively, DG’s free cash flow per share was +0.41. On a percent-of-sales basis, TGT’s free cash flow was 0.55% while DG converted 0.51% of its revenues into cash flow. This means that, for a given level of sales, TGT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. TGT has a current ratio of 1.00 compared to 1.40 for DG. This means that DG can more easily cover its most immediate liabilities over the next twelve months. TGT’s debt-to-equity ratio is 1.13 versus a D/E of 0.54 for DG. TGT is therefore the more solvent of the two companies, and has lower financial risk.
TGT trades at a forward P/E of 14.80, a P/B of 3.06, and a P/S of 0.49, compared to a forward P/E of 18.28, a P/B of 4.35, and a P/S of 1.07 for DG. TGT is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. TGT is currently priced at a 6.87% to its one-year price target of 58.64. Comparatively, DG is -0.27% relative to its price target of 91.89. This suggests that DG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for TGT and 2.50 for DG, which implies that analysts are more bullish on the outlook for TGT.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. TGT has a beta of 0.61 and DG’s beta is 0.94. TGT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. TGT has a short ratio of 7.53 compared to a short interest of 4.33 for DG. This implies that the market is currently less bearish on the outlook for DG.
Dollar General Corporation (NYSE:DG) beats Target Corporation (NYSE:TGT) on a total of 8 of the 14 factors compared between the two stocks. DG has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, TGT is the cheaper of the two stocks on an earnings, book value and sales basis, DG is more undervalued relative to its price target. Finally, DG has better sentiment signals based on short interest.