Dollar General Is Almost a Bargain

05/06/2010 12:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of DRIP Investor, says the discount retailer’s stock has had a nice run, but it’s not far away from an attractive buying point.

Dollar General (NYSE: DG) is a leading discount retailer of general merchandise. The company calls itself the nation’s largest “small-box discount retailer.”

The firm operates more than 8,800 stores in 35 states. Dollar General offers an assortment of basic consumable merchandise, such as paper towels, bath tissue, paper dinnerware, trash and storage bags, laundry, and other home cleaning supplies; packaged food and perishables; beverages, candy, and snacks; health aids, over-the-counter medicines, and personal care products; and pet supplies.

Discount retailers were in the sweet spot during the recession, as consumers “traded down” when shopping. Dollar General’s per-share earnings handily beat the consensus estimate in the January quarter, and per-share profits for the fiscal year are expected to jump nearly 24%.

Dollar General’s stock price has advanced nicely in recent trading, in line with the favorable action of most discount retailing stocks, and is [a bit off] its 52-week high. The stock is on the pricey side, trading at 17.6x the earnings estimate for fiscal 2011 ending in January of $1.62 per share. Corporate insiders are taking advantage of the elevated stock price to sell 26 million shares in a public offering at $27 per share. None of the proceeds of the sale will go to the company.

The equity sale by insiders begs the question—is the stock near a top, at least in the near term? The company’s major shareholder is Kohlberg Kravis Roberts, the private equity firm that took the company private in 2007.

As is the case with most private equity buyouts, the company took on massive debt. The firm has whittled down its debt load over the last year, but still carries long-term debt of more than $3.3 billion, or roughly 50% of total capital.

While I like discount retailers, I’m a tad cautious toward these shares in light of the stock offering by insiders. The stock has had a good run and is due for a pullback. I would be more interested on price breaks to the mid-$20s. (It closed around $28.50 Wednesday—Editor.) The stock does not currently pay a dividend.

Dollar General offers a direct purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $250. The firm will waive the initial minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $25.

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