Oppenheimer Prefers Dollar General Over Dollar Tree, But Is Bullish On Both

The dollar store sector is attractive, according to an Oppenheimer analyst who initiated coverage of both Dollar General Corp. DG and Dollar Tree, Inc. DLTR with bullish ratings.

The Analyst

Oppenheimer's Rupesh Parikh initiated coverage of Dollar General's stock with an Outperform rating and $112 price target and initiated coverage of Dollar Tree's stock with an Outperform rating and $130 price target.

Dollar General

Dollar General's stock has gained more than 30 percent over the past year, but the case for further upside still exists in 2018, Parikh said in the initiation note. (See the analyst's track record here.) 

The dollar retailer can achieve upside from stronger comp delivery, the lapping of large investments a year ago and a "meaningful" boost from tax reform, Parikh said.

Dollar General already operates more than 14,300 stores across the U.S. and could still grow its store count by a mid-single-digit unit growth rate going forward, he said. 

Given the multiple tailwinds ahead, investors can expect Dollar General to sustain a comp momentum in the 2-to-4 percent range, which looks attractive versus a 2.8-percent comp in fiscal 2015, 0.9 percent in fiscal 2016 and an estimated 2.7 percent in fiscal 2017, the analyst said. Similarly, the company could grow its annual earnings per share by around 10 percent moving forward, Parikh said.

The analyst's $112 price target is based on a 20x multiple on fiscal 2019's EPS estimate of $5.60, but adjusting for tax reform yields an 18x multiple, according to Oppenheimer. The attractive valuation makes Dollar General a "top pick" within the firm's grocery and food retailing coverage. 

Dollar Tree

The case for buying Dollar Tree's stock is similar to that of Dollar General, Parikh said in a separate note.

The dollar store can grow its EPS at a double-digit rate on low single-digit comp growth, with other benefits coming from tax legislation, the analyst said. 

The company operates around 14,500 stores, and management has said it can grow the store count to 25,000 units, according to Oppenheimer.

After touring a Family Dollar store that was remodeled as part of Dollar Tree's $8.5-billion acquisition in 2014, the analyst said he's now "more confident" with the company's growth outlook, he said. The new store boasts multiple improvements in merchandising and other adjustments that can drive its profitability higher over the longer term and narrow the gap versus Dollar General over time, Parikh said. 

The analyst's $130 price target is based on a 22x multiple on an estimated fiscal 2019 EPS of $5.91, but when adjusted for the benefits from tax reform, the multiple looks more attractive at an equivalent of 20x, he said. 

Dollar Tree is "more of a higher beta play in the dollar store channel," and integration risks from the Family Dollar merger still remain, Parikh said.

Price Action

Shares of Dollar General were trading higher by 2.26 percent at the time of publication, while shares of Dollar Tree were up 0.76 percent. 

Related Links:

Analysts Look For Value In Dollar General After Q3 Report 

The Best Food Retail Stock Is ... Dollar Tree? 

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