Normally, I'm a big fan of yawnworthy businesses. That's why I'd like to be a Dollar General (NYSE:DG) enthusiast. This is a textbook boring business, selling consumer goods in the boonies to people without much money. By the firm's own count (which you can read in the 10-K, also released today), nearly half its customers earn less than $30,000 per year. In addition, more than half of the company's 8,000 stores serve communities of 20,000 souls or fewer.
That means Dollar General's not really in direct competition with Walgreen (NYSE:WAG) or Wal-Mart (NYSE:WMT), though it does knock heads with established companies such as Family Dollar (NYSE:FDO) and Dollar Tree (NASDAQ:DLTR).
But I can't get behind the stock's current valuation, and today's operating results explain exactly why. For the full year, Dollar General turned in a respectable-looking 12% increase in sales, but only a 2% uptick in comps. As a result of higher shipping costs, hurricane troubles, inventory reduction initiatives, and other challenges, margins wilted across the board. The firm still put up $1.08 per share in net income, a slight increase over last year's $1.04.
But there's the whole problem. With anemic growth, and net margins dribbling down toward 4%, what would you pay for this firm? Currently, the market is asking a price that, according to my math, anticipates 15%-18% earnings growth over the next few years. I don't buy that -- not for a second. That's why I won't be buying this stock, either.
See Dollar General's full year and fourth quarter by the numbers.
Family Dollar is a Motley Fool Stock Advisor recommendation, and Dollar Tree is an Inside Value pick. You can see why with a free trial of either newsletter.
Seth Jayson looks for the good price on the boring biz. You need both. At the time of publication, he had no positions in any firm mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
