Wells Fargo Cites Tax Reform In Dollar General Upgrade

Dollar General Corp. DG's strategy of aggressively opening new stores prompted analysts at Wells Fargo to sit on the sidelines, but President Donald Trump's tax reform has now "dramatically improved" the dollar store's outlook for 2018.

The Analyst

Wells Fargo's Edward Kelly upgraded Dollar General's stock from Underperform to Outperform with a price target boosted from $83 to $117.

The Thesis

Dollar General's "aggressive" store growth strategy justified a bearish stance, especially at a time of growing competition, Kelly said in a note. However, President Trump's tax reform changes the whole narrative and a negative view "doesn't look appropriate" anymore.

Specifically, tax reform could result in Dollar General's momentum accelerating in 2018 and the company's comp sales growth could come in at 3 percent or better, the analyst said. Moreover, the company will benefit from a moderation of expense growth, will cycle "costly" labor investments it made in 2017, and should retain much of the tax savings from lower corporate tax. The share repurchase program could double to approximately $900 million annually.

Given the positive catalysts ahead, Kelly now estimates Dollar General's 2018 earnings per share to be $5.70 (up from $5.40 per share) and 2019 EPs to be $6.15 (up from $5.77).

Price Action

Shares of Dollar General were trading higher by more than 1 percent Tuesday and hit a new all-time high of $103.99.

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