Analyst Bret Jordan at Avondale Partners has begun covering shares of Dollar General with a 'market outperform' rating and a target of $28, a dollar more than any of his peers.
Jordan is more upbeat than most analysts about Dollar General's chances to keep growing sales in 2010. He expects the company to recruit more shoppers from traditional grocers and sees same-store sales growth coming in at 5.3 percent — his fellow number crunchers are looking for lower numbers as year-over-year comparisons become more difficult — and overall sales to come in at almost $13.2 billion. The latter number appears to be the highest estimate on the Street.
Dollar General is "optimally positioned to post out-sized earnings growth in the intermediate term, as improving store-level efficiencies are bolstered by economic tailwinds of low consumer confidence and a bias to trade down," Jordan writes.
Still, Jordan sees 2010 earnings per share to come in at 'only' $1.52, which he calls conservative and which is in line with the consensus and five cents below the highest current estimate. He sees operating costs coming in higher than Pali Research analysts Stacey Widlitz and Brandon Ross – 23.7 percent of sales versus 22.5 percent – and says the company will struggle to continue to meaningfully reduce losses from theft.
Jordan's initiation and price target – which assumes an 18x EPS multiple that is higher than his peers' – are more optimistic than that of Credit Suisse, which this week launched coverage of Dollar General with a 'neutral' rating and a target of $25.
Also this week, Moody's Investors Service raised its rating of Dollar General's various debt tranches citing the company's operational improvements and pending repayment of $300 million of debt. But the firm's analysts noted that the company's future capital structure remains unclear.
"There is a reasonable likelihood that Dollar General will consider re-leveraging at some point in the future, and that there is the potential for future sizable cash payments to the financial sponsor," they wrote.
Since going public five weeks ago, Dollar General shares (Ticker: DG) have been essentially flat. They closed Thursday trading down 1.3 percent at $22.44.