Dollar General Analysis

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Valuation and Analysis of Dollar General

Table of Contents
Executive Summary……………………………………………………1 Overview of Dollar General…………………………………………6 Five Forces Model..............................................………..9

Rivalry among Existing Firms................................9 Industry Growth………………………………………….10 Concentration………………………………………….….10 Differentiation and Switching costs……………………13 Scale Economies and Fixed/Variable Costs…………..13 Excess Capacity and Exit Barriers………………………14

Threat of New Entrants……………………………………..15 Economies of Scale……………………………………….15 Channels of Distribution and Relationships…………..16 Legal Barriers………………………………………………17

Threat of Substitute products…………………………….17 Buyer’s willingness to switch…………………………………17

Bargaining Power……………………………………………..18 Bargaining Power of the Customer...............................18 Switching Cost…………………………………………….18 Product Cost and Quality………………………………..19 Number of Buyers………………………………………..19 Volume per Buyer………………………………………..19

Bargaining Power of the Suppliers……………………...20 Switching Cost...............................................20 Product Cost and Quality………………………………..20

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Number of Suppliers…………………………………....20

Value Chain Analysis………………………………………………...21 Efficient Production………………………………………22 Simpler Product Design……………………………….…22 Lower Input Costs……………………………………....22 Low-cost Distribution…………………………………...22 Minimal Brand Image Cost……………………………..23 Tight Cost Control………………………………………..23

Firm Competitive Advantage Analysis…………………….…...23 Efficient Production………………………………….….24 Simpler Product Design………………………………….24 Lower Input Costs…………………………………..…..24 Low-cost Distribution……………………………………25 Minimal Brand Image Cost…………….……………….25 Tight Cost Control………………………………………..25 Conclusion………………………………………………...26

Accounting Analysis…………………………………………….......27 Key Accounting Policies…………………………………….…28 Degrees of accounting flexibility…………………………..30 Accounting Strategy……………………………………….…..32 Quality of Disclosure……………………………………….….34 Identify Potential “Red Flags”…………………………..….44 Undo Accounting Distortions………………………….……45

Financial Analysis……………………………………………….……48 Trend and Cross Sectional Analysis……………………………48 Financial Ratio Analysis…………………………………………….49

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Liquidity Ratios………………………………………………………..49 Current Ratio………...............................................50 Acid Test…………………………………………………………..50 Quick Asset Ratio……………………………………………….52 Inventory Turnover…………………………………………...53

Profitability Ratios…………………………………………………...57 Gross Profit Margin………………………………….………...57 Operating Profit Margin……………………………….……..58 Net Profit Margin………………………………………….…...59 Asset Turnover…………………………………………….……60 Return on Assets………………………………………….……61 Return on Equity…………………………………….…………62

Capital Structure Ratios…………………………………………..63 Debt to Equity……………………………………….………….64 Times Interest Earned…………………………….…………65 Debt Service Margin……………………………….…………66

IGR/SGR Ratios………………………………………………………67 Forecasting Financial Statements…………………….……….70 Income Statement……………………………………..……..70 Balance Sheet……………………………………….…………72 Statement of Cash Flows………………………..…………75

Cost of Capital Estimation…………………………….…………76 WACC estimation….………………………………………….………..78

Valuation analysis………………………………………………….79 Method of comparables………………………………………………80

Intrinsic Value Models…………………………………………………….85 Discounted Dividends Model……………………………………….85 Free Cash Flow………………………………………………………….87

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Residual Income…………………………………………….………….88 Long Run Residual Income…………………………….…………..90 Abnormal Earnings Growth…………………………….…………..91

APPENDIX……………………………………………….92

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Executive Summary
Investment Recommendation: Overvalued, Sell 6-1-07 DG----NYSE (6/1/07) $21.63 52 Week Range $12.10-$21.85 Revenue (2/2/07) $9,169,822 Market Capitalization $6.86 Bill Shares Outstanding 314.88 Mill 3-Month Avg. Daily Trading Volume: Institutional Ownership 66% Book Value per Share $5.706 ROE: 20% ROA: 12% Cost of Capital Est. 3-Month...
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