Subject: Re: OT Gurus Focus Dollar General
Jim, please let us know when you pound your mahogany table!

I set a limit for how much I was going to buy.
Blew through that yesterday.
Of course that doesn't mean that it was a good move, but I'll admit it.

My thinking went like this:
If I sell these DG securities that I own, and buy these DG securities instead, I'll improve my breakeven per share and have even have upside on a few more shares...but then I couldn't bring myself to do all the sales : )

Here's a little something to get a handle on things: anyone considering the purchase of any single stock should have a notion of what it might be worth, not just table thumping from Some Guy on the internet. Get out an envelope and turn it over, grab a pencil.

As with most firms, they have some better-than-average and worse-than average years.
If you eyeball a smooth line through their history of earnings, you can get an idea of what the cyclically adjusted level might be.
Using that, and historical stock prices, you can get an idea of what the market valuation level was in the past.
The average cyclically adjusted earnings yield between 10 and 4 years ago equated to a P/E of 18.5
The average cyclically adjusted earnings yield in the last 4 years has equated to a P/E of 21.6, but let's ignore that.
I consider it a better-than-average firm with better-than-average prospects for growth in value per share.
On that basis, I am pencilling in a future price of around 18.5 times future cyclically adjusted earnings as "normal" for them. Even if the average is reasonably far from that, the variability of valuations in this industry pretty much ensures that this number will be hit from time to time.

How about a growth rate?
Sales per share have risen around inflation + 10.0%/year in the last five years. Let's reach into a sack of dice and say inflation + 6.5%/year seems possible, as a stake in the ground for discussion purposes. If we assume that net margins remain unchanged from their currently below-average levels, the sales rate of growth is also the forecast for EPS growth.

They're making money at the rate of around $10.50 per share at the moment, so we start off our forecast by increasing that by inflation+6.5%/year.

One downside to remember:
Debt is about $7bn. Interest rates have risen. Interest cost per share was $0.96 last fiscal year (ended January 2023), and $0.68 the year before. Let's imagine a new level of $1.60/share cost for this and subsequent years. (that $1.60/share/year equates to an assumption of around 5% weighted average interest rate on $7bn balance on 220m shares outstanding) So, compared to current costs around a buck, we can knock $0.60 off future pretax earnings per share, which equates to knocking $0.46 from after-tax EPS. Their tax rate is quite high.

So we will remove that much from all our future EPS figures. e.g., next year might be $10.72 instead of the $11.18 that you'd get with 6.5% growth from current $10.50ish.
(Note, a debt pile is the one thing that inflation is good for. Since we're assuming the interest rates and costs will rise then stay flat, we are implicitly assuming that real debt will rise with inflation, not get eroded nor paid down at all--reasonably conservative)

So, working from all those numbers, and assuming (say) a five year hold, EPS would be $13.93 in five years (in today's dollars) and price would be $258 (in today's dollars). From today's price of $155, that would be a five year return of inflation + 10.70%/year compounded.

Modify your assumptions to suit, but that seems like a very attractive starting back-of-the-envelope return.

I don't see many of the more common risk factors. No defined benefit pension plan. Debt is not a problem: the $7bn balance seems very moderate compared to the aggregate $8.7bn in cash flows from operating activities in the last 3 years. In essence, they don't ever need to roll: if their maturity is reasonably staggered, they could probably pay off every note out of current earnings as it comes due if they wanted to. They don't have bad credit card debt or bad receivables the way a lot of firms do. They are very geographically dispersed, so weather and climate risks are presumably diffuse.

Jim