Undervalued Possibility in Dollar General?

all right y'all so today I wanted to just make a video real quick um I was looking on Wall Street Journal Finance section and uh I saw that the Dollar General stock went down 29% this morning and so what I want to do is show you guys a potential undervalued investment in Dollar General um in general if you uh look at these 52 we highs and lows you may find um Potentials in fact Dollar Generals on this list today um and so is Advanced Auto Parts so we can look at that even as well right now and another way you can find out is biggest stock Losers of the day I tend to use this um company trading view cuz I like how the website looks mostly but um you can see 29% um this is a massive company you know compared to the other ones that have gone G down in price so I'm going to take a look at their financials and let's let's do uh our traditional tests to see whether this is an undervalued stock so first test are do they have growth and or stability in net income they had a reduction since 2021 um but that was definitely an exceptional year and now they've gone down to sort of their average between at the end of 2018 2019 so we're looking at a net income quarterly uh of a normal amount of about. 35 billion um that's 350 million so if we use that amount. 35 now we can get the annual net income by multiplying by four to get 1.4 billion for the net um income of a normal year and then excuse me then we go to the market cap we get 19.3 so we get the market cap divided by the annual net income for our normal number of 1.4 and we get a PE ratio of 13.8 that is low that is low considering the fact that they have had growth in all the years prior to that then they also have had Revenue growth consistently um almost on a quarterly basis so this could be winner actually uh I want to look at the shares outstanding to see if they're shareholder friendly boom shareholder friendly stock patience is a virtue I guess I need to learn a little bit better how to have patience to um to value stocks to find stocks uh .5 billion in uh dividends paid for 2023 and that would be out of a 19 market cap so a yield dividend of 2.6% pretty good uh let's look at their SEC page we're going to find their 2024 earnings first and although the company obviously hasn't posted their 2024 earnings year yet because the year hasn't ended we can calculate it by using their latest 10q year-over-year uh discrepancy so what that means is getting the net income for the most weeks ended we can find so this is 26 weeks ended and it looks like a reduction of 983 to 737 so I'm going to find what that difference is that's a difference of 246 million and then we're going to subtract that difference from the 2023 10K and so what that does is it sort of extrapolates uh net income from the most current 10q and from the most recent or last years in this example's uh annual so annual net income financial statements net income and it's going to be oh so this is actually going to be for 2025 rather than 2024 so 2025 net income excuse me is going to be this number minus 246 which is with our discrepancy so 161 minus answer 1415 is our net income for 2025 so that's in million so 1.4 billion and then we're going to find the um uh invested Capital so I want to find a return on their invested Capital um this is a retail company so we actually I have a retail company in my portfolio Ulta beauty which I uh don't um am not giving Financial advice but that that is what I purchased and so I can compare it against that company as well so the roic so invested capital is going to be operating current liabilities which is 7,000 Millions um for the most recent un audited of August 2nd 2024 and then income taxes receivable is going to be [Music] 61 plus prepaid expenses and other current assets so let's see if there's any mention there's no mention so I'm just not going to include it because prepaid expenses is not an operating current asset all right that gets us a total of 7 b61 then we're going to add net property and equipment so plus 6269 then adding operating lease assets so plus 11 to20 plus Goodwill 4339 plus other int Ables 1,200 rounded and we're not going to include this number it's quite a negligible amount so right now we're at 30 b89 and we finally need to subtract the um the current non-interest bearing liabilities so it's going to be not this cuz that's long-term obligations not this cuz that's leases but this so - 3869 then minus acrude expenses 1064 then minus income taxes at at 12 longterm operating leases deferred income taxes let me just make sure that I have the correct formula there we go right right so this is yeah it says it right there non-interest bearing current liabilities good so that gives us an a number of invested Capital at 25144 okay I didn't write down their net income for 2025 I should have it in my calculator I don't it was 1.4 though I I remember that number so 1,400 this is all in millions and then 2544 okay this is giving us a 5.6% return on invested Capital does that make any sense what's their return on shareholder Equity it's going to be 1.4 / 7.3 so return on Equity is about 19% okay I mean let's let's compare Theirs to Costco okay let's see let's see if that's a that's a normal number for a good company like Costco so we're going to look at their 10q this is just to compare a comparative analysis of their return on invest Capital I'm just going to exit out of these tabs so that's our invested capital for Dollar General I'm going to look at their 10K so first need to find their most recent net income 36 weeks ended a discrepancy of 5013 minus 4132 is 881 in millions then a 10K financial statements income net income attributable to Costco so 6292 and we're going to add that to our discrepancy of8 81 7173 and millions divided by we're going to find their invested Capital once again receivables 2583 plus merchandise in inventory 17430 plus other I'm not going to include that property operating lease right of use um other I'm not going to include that and accounts payable minus accounts payable minus ACR salaries and benefits oh minus ACR member rewards minus deferred membership fees so these are all non-interest bearing except for long-term debt and I'm not including other okay so now we have our answer is 60305 in millions so that's 60 billion approximately that is our return on invested Capital so 12% versus 5.6% that's not that impressive um just spilled some coffee on my computer only a drop all right so let going to go back and make sure and just doubly make sure that my numbers are right right on Dollar General I'm going to be as impartial as I can so I'm not going to give them benefit of the doubt when there is no reason to do so so we're going to try this one more time 7,000 plus income taxes at 61 plus we're not including this plus net property and equipment plus oh wait I think I see what the problem is wait what operating lease assets wait maybe I maybe there is no problem actually wait wait this doesn't make a lot of sense net property I'm going go to their 10K we'll get more information on the components of what those numbers mean this is an interesting accounting design like the fact that they use lines in between all them I'm trying to see if that makes any difference no looking for their items and notes okay H okay so we're going to go back and continue where we left off so 6269 so it looks like we're on the right track right now all right 6269 plus operating lease assets of 11 to20 plus Goodwill of 4339 Plus other intangible assets at 1,200 okay 30 billion then subtract nope nope this one ACR expenses and income taxes n nope 25156 all right well that's it I mean that's all she wrote 25156 and that's pretty much what we got so they do in fact have a 5.6% return on invested Capital which is very unimpressive um let's look at their direct competitors like do they have cuz this is a product that doesn't necessarily come in Trends or waves like say uh you know a certain type of shoe like Birkenstock shoes or you know um a certain type of bottle like a Stanley bottle let's see so direct competitors of Dollar General discount stores Dollar Tree and Family Dollar I'm aware of Dollar Tree and so and they have a public stock so let's look at Dollar Tree let's compare cuz Costco it is a retail giant but it's not exactly in the same thing it's like more of a discount retailer so let's let's look at their the discount retailing side which is what they're most associated with anyway so we're going to do the same exact process one more time with Dollar Tree and then while we're waiting I'm going to take a look at their operating margin compared with Dollar Tree pretty much similar to 20120 wow it's definitely higher than Dollar Trees at least they'll be able to meet their barely yikes I mean what's their working capital I'm actually just going to do that real quick I'm going to look at Dollar General's working capital just to see like how how safe they are in terms of like meeting their shortterm liabilities cuz usually with a company that has this you know lowering operating margins lowering nit income and it's of a big and seasonal business then that's a number that can be very helpful so current assets this is very simple my us current liabilities so 8724 minus total current 7141 and then we're going to divide by and the 19 which is their market cap divided by that it's about 12 times working capital current assets yeah I mean it seems like they're a little bit on the insolvent side CU they have such a low like their quick ratio of of inventory is really terrible like if you take out inventory their quick ratio which is basically current um assets so minus inventory so 8724 minus 7,000 divided by current liability so divided by 7141 yeah they have a quick ratio of .24 and the authors of security analysis recommended a quick ratio of of more than that but they have maintained that quick ratio for a long time so it seems like that's just their normal business operation and they have um enough that that margin is enough safety for them to continue businesses normal I mean they grew during this period so we may have a an exception to the quick ratio and current ratio rule um let's go back to Dollar Tree we're going to do their return on invested Capital real quick so net income [Music] for do they have it's only 13 weeks ended yeah I guess so okay so 13 weeks ended net income $299 so that's literally that's literally a non discrepancy it's it's like one it's $1 million so we can just use their 2023 10K with with no problem as their as their current most current earnings that we know of so oh that's interesting wow so it's 998 negative we can't do a return on invested capital for negative yikes okay so we'll take last last year so 165 and then we'll take their current 10 Q as the invested Capital so 16 15 in millions divided by their current invested Capital so inventories 5,9 not including other we're not including restricted cash uh plus 6301 which is the PPN operating Plus 6469 plus trade names plus that's it so that's all that's it for the asset side gives us 20.8 billion and then subtract all the current non-interest bearing liability so we're not using leases we are going to use counts payable income taxes payable and we're not going to use other so right now they're at 18494 and I'm just going to put these side by side in the other ones boom return on invested capital of 88.7% that's higher than Dollar Generals but we have to Discount this at least a couple percent because they literally have negative 1 billion net income currently so you can see right here they've actually had it for two quarters straight um yeah so it doesn't seem like uh Dollar Tree is going to be a very fair comparison even though it makes Dollar General look way better they're just doing such a terrible job does Family Dollar no let's see tra view sometimes has a good sense of the competitors so I'm going to check out discount stores industry oh yeah Five Below isn't that okay yeah let's compare Five Below so we're going to do this again cuz I'm I'm trying to figure out you know what a good roic is for this type of company because it's hard to just say it across the board however at the same time 5.6% is low real low jeez okay we're back 31 that's a discrepancy of about 6 million decrease 301 minus 6 so this is 295 for 2024 in millions for Five Below that's their net income and then we're going to find their return on invested Capital I'm just going to do it real quick okay invested Capital 2957 that'll give us around 10% all right um yeah I mean it seems like they're definitely on the low side Dollar General uh in terms of return on invested Capital so it's not a good sign however as a going concern so this is what I'm going to call from now on the going concern value I'm going to make a note of that in my notes even though you can't see it AKA going concern value so what that's going to show is what the value of this business is as a going concern rather than just a liquidation so we're going to go to Dollar General we're going to calculate their liquidation value and then we're just going to calculate their price over liquidation value so one 2223 1 two2 3 as their Cash Plus 66 times their inventory plus um that's it then subtract current liabilities at 7141 and then add 0 2 * total assets 31813 minus total current liability current total current assets 8724 824 okay 3.3 20 billion so 3.3 billion uh is their liquidation value all right and then 19 over that so they're only six times their liquidation value and usually you see far more than this like here let's let's calculate it for a Dollar Tree which has much less earnings that's for sure okay I'm just going to do this real quick it's kind of funny they're both exactly almost exactly organized as the other and their balance sheet K and then plus2 * 22 110 minus 6082 4779 18.440 Millions there we go okay uh this is about this about four times is about six times so you can see that even though Dollar Tree has way this is Orange is Dollar Tree and blue is Dollar General has even though Dollar Tree has a horrible going concern value in their net income their liquidation value is ex is like four times their uh their price is four times the liquidation value and that's similar to Dollar General's going concern value so either Dollar Tree General is extremely overvalued which is likely or Dollar General is Extreme ex undervalued or a little bit of both so this isn't this is a tough one cuz if we just go by our you know normal standards you know filter by seasonality uh leave those out with a product or service that comes in Trends or waves uh identify those with little or no direct competition I don't know I happen to know a little bit about the qualitative um review qualitative E I happen to know a little bit about their qualitative factors because uh I watched this Great Wall Street Journal video that I highly recommend and it was talking about how they uh how they started why why they why they've been so dominant yeah the economics of and the reason is because they've sort of created this like they've hooked this the Midwest and um they're basically in every very rural not a lot of uh not very connected areas and so they've sort of monopolized these very rural areas in the United States you know you can see boom there's nothing and then there's a Dollar General here these are their locations yeah you can see they're focused in the midwest or or sorry not the Midwest but like the mid sort of East like this Rural America area um yeah they're very very that that's a the Dollar General right there so you know Rural America is definitely struggling uh and so that's one reason why their stock has been tumbling because Rural America can't handle the insane inflation that's been going on um yeah no wonder why okay I'm not going to get into politics but uh yeah Dollar General I mean I'm going to look over the list more Sherer friendliness past Revenue they have growth invested Capital it's kind of low um what's their I'm going to keep looking at their uh this is Dollar General right yes I'm going to keep looking at their balance sheet so what's their tangible Book value so we'll first find net property and Equipment 6269 I'm just going to make sure I know what I'm doing yeah yeah yeah yeah yeah okay it's shareholder Equity minus intangibles so minus 1199 or I should say 1,200 minus Goodwill 4 4339 Goodwill that can be a lot of things and other intangibles can be a lot of things um trade names uh what's it called patents um it can also be the fair value of of what they get from an acquisition uh in terms of like the the Surplus over what they paid for a company it can be a lot of things but it's usually not you know said as to be a tangible asset it's never said to be a tangible asset so 1721 is their tangible Book value yeah I mean it's definitely it's definitely a big multiplier um it's expensive here let's let's look at their PE or PB I should say Price to Book over history so yeah they they dropped recently down to normal levels I'm just going to put in Ulta just to see what comes up okay Ulta so I'm buying it around here which is where it is at normal levels or so so it's comparable to Ulta [Music] but yeah it should be more expensive than Dollar Tree because much more than just one point I mean Dollar Tree has s much worse financials um what's their tangible asset value so 8724 plus net property equipment 6269 then subtract uh all of these which are operating so all of them so subtract 7141 tangible as of value of 7.8 so 19 over 78 42 Jesus I keep forgetting to put it in millions there we go it's only 2.4 * their tangible asset value which is a calculation deemed by security analysis to be uh a good measure of tangible assets that is pretty low to be honest and if we [Music] go this would be about their current asset value it's about 10 times and even lower they would have a negative cash asset value but this is a very interesting stock but I just think I feel that the PE Ratio that we got for them which was what if we go all the way back it was 1.4 so 19 over 1.4 13.6 PE ratio it's just low I me I mean that means that they just have a neutral like Outlook like the long-term neutral the long-term outlook for this company is like pretty neutral we don't know where it's going to go exactly but Dollar Tree they definitely are going to steal market share from Dollar Tree no doubt I mean they're they're going through so much trouble Dollar Tree um I'm going to actually go can they steal market share from companies that are struggling okay so I mean that's a good question to keep in mind that I add it to the criteria list like for Dollar Tree you know they could definitely steal some market share cuz they've had such horrible net income so anyway just a thought Dollar General may be a good find um I'm going to do a little bit more research into it but I don't know I like retail because it gives you a diversified uh set of products rather than one that you're depending all your investment on and um the only and there a shareholder friendly company but the only problem I have is that they have such a low return on invested Capital so we're going to see we're going to see with this one but I hope you enjoyed that video and I'll see you in the next one