Deutsche Positive On Dollar General, But Cuts To Hold Rating Based On Valuation

Deutsche Bank has downgraded Dollar General Corp.

to Hold from Buy on valuation. "Our new price target of $99 (up from $95) is based on 19.0x (vs. 18.0x prior) our FY17 EPS estimate of $5.20 (down from $5.25 due to lower margin assumptions), which no longer equates to a Buy," analyst Paul Trussell wrote in a note. That said, Trussell is positive on the fundamentals of Dollar General as he expects the company can sustain about 2-3 percent comp growth as the low-end consumer "appears in relatively fair shape." The analyst also highlighted the company's accelerating square footage growth, upside opportunity on margins, sustainable positive SSS, and strong cash flow. However, despite seeing strong execution to continue, the analyst said he tempered his expectations related to margin gains ahead. "While we are confident in management's ability to execute on its margin driving initiatives, we choose to be conservative at this time. We are modeling GPM down slightly for the remainder of the year and flattish in FY17 as we believe WMT's price investments could offsetmargin initiatives at DG," Trussell noted. For the second quarter, the analyst expects EPS of $1.07 (12.5 percent YOY growth), $0.02 below the Street but in-line with the company's long-term EPS growth target of 10-15 percent, based on SSS up 2.4 percent vs. the Street at 2.6 percent. On the margin front, Trussell projects gross margin down 7 bps YOY to 31.1 percent. At the time of writing, shares of Dollar General were down 1.04 percent to $93.75.