Only a few weeks ago, Dollar General
The company's warning on Friday evening also opened the door to a revision in full-year guidance when the company reports on Aug. 31. So it's possible that the bad news isn't over yet. That said, any time a stock that isn't glaringly overvalued falls nearly 8% in a day, it's worth taking a second look to see whether investors are overreacting to the bad news.
Dollar General's trailing P/E of 12 screams "cheap," but we Fools are always more curious about a business's free cash flow. On this metric, Dollar General seems a bit less cheap. Using the company's trailing-12-month free cash flow of $186 million, and running a spreadsheet-powered discounted cash flow analysis, I find 20 years of 6% growth and 3% terminal growth priced into the company's shares. That's a bit pricier than the P/E alone would indicate.
Taking a different view, and using the company's average free cash flow over the last four and a half years, reduces the expectations priced into the stock to 4.5% growth for 20 years and 3% terminal growth. That may be more achievable, and it does appear that the company's capital expenditures have been elevated the last two years, which seems to be depressing Dollar General's free cash flow in the near term.
That said, this company must compete with all kinds of low-priced retailers, from Inside Value selection Dollar Tree
As you've probably guessed, it would take a dream valuation -- say, 0%-1% growth priced in -- to get me interested in Dollar General, particularly given its current declining levels of profitability. That said, such a scenario may unfold in a little more than a week, when the company provides its earnings report and potentially updates its guidance. Until then, I see little reason to do anything more than sit tight.