Dollar General Still Looks Cheap, Based on Its Bold Expansion Plans

NEW YORK (TheStreet) -- Investors currently considering buying Dollar General (DG) could easily feel like they're "a day late and a dollar short." Shares trading at near all-time highs and up some 36% in the past year, crushing the broader averages. Not only that, but if you've owned shares in Dollar General for the past five years, you've seen a 140% return on your investment, compared to 77% gains for the Dow Jones Industrial Average (DJI).

But that doesn't mean it's too late to make money on Dollar General.

Ahead of Dollar General's fiscal first-quarter earnings results, due out Tuesday before the opening bell, there are tons of reasons to still want to buy Dollar General -- that is, if you're willing to hold for the long-term. And by "long-term," I mean 18 to 24 months.

Dollar General, one of the largest discount retailers in the U.S., has come up with a growth strategy to better compete not just within the dollar store segment, but against low-price leader Wal-Mart (WMT). Making that plan a reality won't happen overnight, though.

Still, there's enough evidence to suggest investors should want to buy and hold Dollar General. I estimate its share price will rise to the $85 to $90 range in the next two years, up from Friday's close of around $72. That would translate to gains in the 20% to 25% range. And Dollar General has offered multiple incentives to be patient.

For starters, the company -- having now joined the ranks of dividend payers -- has become more shareholder friendly, too. The company plans to buy back some 5% of its outstanding shares over the next year, when factoring in the $1.3 billion remaining on its current buyback authorization.

I'm also expecting Dollar General will hike its annual dividend each year, adding to its appeal. it's trading today at just 20 times earnings, which is relatively cheap. The average S&P 500 stock trades at a P/E of 21 -- which means plenty of them trade higher.

What does all of this mean?

Not only does it affirm that Goodlettsville, Tenn.-based Dollar General feels more confident about its cash position, it means the company has found a winning formula. The retailer's plans to increase its store count -- currently over 13,000 locations -- by 7% annually in the next two years imply plenty of room for growth.

It's an aggressive growth strategy, one that is likely to impact rival Dollar Tree (DLTR), which outbid Dollar General to buy Family Dollar (FDO). And while Dollar General may not be able to fight Wal-Mart on price, by adding store locations, it can potentially hurt the world's largest retailer by offering customers more convenience.

All of this actually diminishes the importance of Tuesday's report. The consensus earnings estimate for the quarter that ended in April was 82 cents per share, up 14%, with revenue projected to have climbed 9% to $4.94 billion. Still, Dollar General is now in play based on where it's headed in the next two years. So don't focus too much on Tuesday's results. Better yet, when you look at the higher share prices down the road, don't discover yourself once again a day late and a dollar short.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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