Dollar General Corporation (NYSE:DG) shares are up more than 5.57% this year and recently increased 3.60% or $3.41 to settle at $98.19. Dollar Tree, Inc. (NASDAQ:DLTR), on the other hand, is up 3.76% year to date as of 01/11/2018. It currently trades at $111.35 and has returned 2.29% during the past week.
Dollar General Corporation (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DG to grow earnings at a 7.35% annual rate over the next 5 years. Comparatively, DLTR is expected to grow at a 13.48% annual rate. All else equal, DLTR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 11.42% for Dollar Tree, Inc. (DLTR). DG’s ROI is 15.70% while DLTR has a ROI of 10.70%. The interpretation is that DG’s business generates a higher return on investment than DLTR’s.
The value of a stock is simply the present value of its future free cash flows. DG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, DLTR’s free cash flow per share was -1.10. On a percent-of-sales basis, DG’s free cash flow was 0.51% while DLTR converted -1.26% of its revenues into cash flow. This means that, for a given level of sales, DG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. DG has a current ratio of 1.40 compared to 1.90 for DLTR. This means that DLTR can more easily cover its most immediate liabilities over the next twelve months. DG’s debt-to-equity ratio is 0.54 versus a D/E of 0.95 for DLTR. DLTR is therefore the more solvent of the two companies, and has lower financial risk.
DG trades at a forward P/E of 18.89, a P/B of 4.66, and a P/S of 1.15, compared to a forward P/E of 20.45, a P/B of 4.31, and a P/S of 1.20 for DLTR. 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. DG is currently priced at a 0.43% to its one-year price target of 97.77. Comparatively, DLTR is 2.8% relative to its price target of 108.32. 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 2.30 for DG and 2.10 for DLTR, which implies that analysts are more bullish on the outlook for DG.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. DG has a beta of 0.95 and DLTR’s beta is 0.67. DLTR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. DG has a short ratio of 2.92 compared to a short interest of 2.40 for DLTR. This implies that the market is currently less bearish on the outlook for DLTR.
Dollar Tree, Inc. (NASDAQ:DLTR) beats Dollar General Corporation (NYSE:DG) on a total of 7 of the 14 factors compared between the two stocks. DLTR generates a higher return on investment, is more profitable and higher liquidity. Finally, DLTR has better sentiment signals based on short interest.