Deutsche Bank Raises Dollar General Price Target

Deutsche Bank raised its price target on Dollar General Corp. DG from $73 to $86 and maintained a Buy rating.

Analyst Paul Trussell commented that “If, and it's a very big if, DG is successful in acquiring Family Dollar, I we believe the combined entity could produce up to $7 in EPS by FY18.”

Trussell added that by his “calculations, that equates to ~$2.5B equity value over time, as we apply a conservative 16x forward multiple supported by a strong management team known for execution and a macro backdrop favorable for retailers catering to low-to-middle-income customers.”

Trussell believed “the DG/FDO deal is worth ~$1.15/share as originally laid out, reflecting synergies of $550M. However, as synergies are actually understated by $200-$300M in our view, we think value could in fact be upwards of $1.50- $1.75, depending on how many stores need to be sold.”

The firm’s “base case of 2,500 divestitures (from 1,500 previously) and a closing date at the end of 2Q15, we calculate ~$0.50 in net accretion (8 percent upside vs. our DG standalone forecast), or ~$1.00 (16 percent upside) in the higher synergy scenario. Importantly, we believe that every 1,000 stores divested would result in a ~$0.25 net impact to accretion in the synergy base case.”

Trussell concluded that “If DG doesn’t successfully acquire FDO, we believe it would increase leverage by at least half a turn (from ~3.1x at FY14 end) to buy back ~$1.4B of stock (~6.5 percent of the float).”

The $86 price target was based on 16x the FY17 deal scenario EPS discounted at 10 percent.

Dollar General recently traded at $68.98, down 1.8 percent.