No. of Recommendations: 16
Can we flip the discussion: Why should it trade at 10 times projected 2023 earnings? I'm having trouble understanding why it would, particularly given that it continues to grow revenue at a decent clip despite the recent setbacks, and given that it continues to show it is able to generate profits even in less than ideal circumstances.
Among other things, 10 times P/E is well below the average market multiple, and is nowhere near a multiple DG has ever traded (today's price is looking at the forward P/E, which is still at about 14 and change forward P/E). If there is some reason the future will be drastically different than the past, what is that reason?
Even a struggling firm like Target is, as of today, over 15 P/E. Walmart & Costco blow that away, despite being 'retail'. Profitable grocers such as Kroger do as well. It may be that DG is maturing, growth prospects are slowing, profit margins will come down, and its average multiple will come down as a result. But I don't understand why we'd anchor the discussion on whether 10 P/E is the right P/E.
If we want to hash out a bear case, I think it's far more likely that EPS comes down or stabilizes in the $7-8 range (due to things like increasing competition and an increasing cost of labour), or worse, and the firm trades at 15 P/E from that multiple (like Target today).
But, if so, I'd like to hear the case as to why DG's ability to generate profits is in secular decline. The more obvious explanation to me is that DG is experiencing something very similar to what it did in 2008/09 -- a temporary dip in margins arising from a cash-strapped customer base (hence the move to consumables, etc., in recent quarters).
