We believe that Dollar General (NYSE: DG) is currently better valued than Target (NYSE: TGT). Target’s current market cap-to-operating income ratio of 17x is higher than levels of 14x for Dollar General. But does this gap in valuation make sense? We don’t think so, especially if we look at the fundamentals of these companies. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and the market cap-to-operating income ratio for these companies. Our dashboard Better Bet Than Target: Pay Less To Get More From DG has more details – parts of which are summarized below.
1. Revenue Growth
Target’s revenue grew at an average rate of 9% over the last three years, as compared to revenue growth of 13% for Dollar General. While both these retailers benefited from consumers spending more of their disposable cash on food and essentials rather than on vacations or dining out in 2020, if we look at the revenue growth over the last twelve-month period – Target’s revenue growth of 20% is less as compared to 22% growth for Dollar General.
- Dollar General is the largest small format retailer in the U.S. by store count. In spite of its name, it sells merchandise of prices up to $10. In 2020, Dollar General’s same-store sales increased by 16.3%. However, the company doesn’t just do well in challenging times. This was its 31st consecutive year with comps growth.
- Target is the second-largest discount chain in the U.S. The company added $15 billion to its sales base last year, equating to a 20% increase. That spike came from the combination of a 145% boost in the digital channel and a 7% uptick in comparable-store sales.
2. Operating Income Growth
The three-year average operating income growth for Target stands at 17%, much lower than 23% for Dollar General. Better revenue growth for the latter led to higher operating income. Looking at the last twelve-month period, Target’s 39% rise in operating income compares with 54% gains for Dollar General.
The Net of It All
Dollar General has seen higher growth in revenues and operating income than Target in the last twelve months, as well as the last three years. Yet, it appears to be cheaper than Target. Despite better profit and revenue growth, Dollar General has a comparatively lower market cap-to-operating income ratio.
Target’s underperformance in revenue and operating income growth compared to Dollar General reinforces our conclusion that the stock is expensive compared to its peer, and we think this gap in valuation will eventually narrow over time to favor the less expensive name, Dollar General. As such, we believe that Dollar General is currently a better buying opportunity compared to Target.
While Dollar General appears to be a better investment than Target, it is helpful to see how its peers stack up. Dollar General Stock Comparison With Peers shows how DG compares against peers on metrics that matter.