In the third quarter, Dollar Tree Inc. (NASDAQ:DLTR) had more than $3 billion in sales, while Dollar General (NYSE:DG) had nearly $5.10 billion in its third quarter. With both of these companies in the same industry, which is the better buy?
Comparing both companies' numbers side by side tells a surprising story of which company is the strongest. Dollar Tree, with a $16.06 billion market cap, generates $36.64 per share in sales, while Dollar General, with a $18.88 billion market cap, generates almost twice as much at $64.17 in sales for every outstanding share. How does a company only slightly smaller than Dollar General generate almost two times as much in sales?
On the cash flow level, Dollar General narrowly edges out Dollar Tree with $3.61 per share in cash flow versus $2.55 a share. Though Dollar Tree has Dollar General beat when it comes to current assets per share, Dollar Tree has $4.82 a share in current assets, while Dollar General has an net asset value of $3.96. Dollar Tree has an earnings yield of 2.2%, while Dollar General wins with an earnings yield of 5.8%. Dollar Tree also lags behind in terms of PE ratio at 45.77, compared to Dollar General at 17.11.
According to Graham and Dodd's "Security Analysis," asset value and earning power are unrelated. While Dollar General generates significantly more sales and revenue than Dollar Tree, Dollar Tree is also at a disadvantage in this comparison because of how expensive its stock is compared to Dollar General. Currently Dollar Tree has a book value of $17.24 and has a P/B ratio of 3.89, while Dollar General has a book value of $18.39. But Dollar Tree falls short with its 3.19% net profit margin when Dollar General has a net margin of 5.73%.
In 2005 Dollar General had an EPS of $1.04 and currently is earning $3.49 a share, growing at 12.87% compounded annually. Dollar Tree that year had an EPS of 53 cents, while they are now earning $2.90 a share, a 18.53% growth rate compounded annually, which is significantly higher than Dollar General's growth rate.
Dollar Tree has a shareholders' equity of $7.60 a share and net earnings of $2.55 a share, while Dollar General has shareholders' equity of $19.38 a share and net income of $3.61 a share. From a shareholder's position, each share of Dollar Tree that you own has a certificate attached to it that pays $2.55, while Dollar General carries $3.61. This means that each Dollar General share owned is yielding a 18.6% return on shareholders' equity ($3.61 / $19.38 = 18.6%), of which 76% is retained by the company and 24% (88 cents) is paid out as dividends to shareholders. Though, each share of Dollar Tree is yielding a 33.5% return on shareholders' equity ($2.55 / $7.60 = 33.5%) and is retaining 100% of their earnings, paying no dividend.
On the net income level over the last 10 years, Dollar Tree has grown their net income 13.17% compounded annually, growing from $173.92 million in 2005 to $599.2 million currently. Dollar General has seen their net income grow 11.82% in the same 10 years, from $350.16 million in 2005 to over $1 billion currently. Looking at how the two companies are growing their book value, we see Dollar General has grown their book value from $5.45 in 2006 to $18.82 currently, a 13.19% compounded annual increase, while Dollar Tree has seen their book value shrink from $11 in 2005 to $8.68 currently, a decrease of 2.34% compounded annually.
Debt can also make or break a company. Dollar Tree currently has a very reasonable debt to equity ratio of 0.53, while Dollar General has a worrisome debt to equity ratio of 2.10. Is all of Dollar Tree's growth coming from its high debt levels? On their balance sheet, Dollar Tree has $4.983 billion in Goodwill, while Dollar General has $4.339 billion in Goodwill. In March, Dollar General announced a $1 billion share repurchase program, while starting in 2007 the company issued a $500 million share repurchase program. Dollar General is obviously more encouraging and rewarding for its shareholders with such a large buyback.
Dollar Tree's CEO Bob Sasser has been with the company as CEO for 11 years, and under his leadership, revenue increased from $3.39 billion in 2005 to $8.60 billion currently, an annual increase of nearly 10%. Under Sasser the stock price has grown 19.50% compounded annually the past six years. Dollar General CEO Todd Vasos took the reins of the company on June 3. It's also interesting when you compare the executive compensation at Dollar General versus Dollar Tree. Dollar Tree's Sasser earned $18,542,726 in 2014, while Dollar General's CEO earned even more, $19,454,161 in 2014. Does Dollar General's CEO deserve such a high compensation for results that are lower than their competitor?
The intrinsic value of both companies is also important to look at. Using Benjamin Graham's Intrinsic Value formula (with the previous 10 years EPS growth rate), we see that Dollar Tree has an intrinsic value of $76.06 per share, while its shares are currently selling at $68.42, an 11.15% upside. Looking at Dollar General's intrinsic value using the same formula, we find that its shares are worth $134.47, almost a 110% upside. Perhaps the Dollar General buyback has played a part in increasing the intrinsic value of the company.
From 2010 to 2015, Dollar Tree's Intrinsic Value grew from $58.41 in 2010 to $76.06 currently, increasing 5.42% a year. Over the same period, Dollar General's Intrinsic value grew from $15.65 to $134.47, increasing 53.75% a year (this calculation does not include dividends).
