Dollar General Corporation (NYSE:DG), a leading figure in the retail sector, is currently undervalued by about 41%, as indicated by a recent financial analysis. The company's shares are trading at $120, significantly below the estimated fair market value of $204.
The valuation was conducted using a 2 Stage Free Cash Flow to Equity model, a well-regarded tool for determining a company's intrinsic value. This model considers two different periods of growth rates for a company's cash flows: an initial stage of higher growth, followed by a slower growth phase. It is utilized to estimate a firm's future cash flows over the coming decade.
The process involves extrapolating previous free cash flow values when analyst estimates are not immediately accessible. The model presumes that companies with diminishing free cash flow will slow their rate of shrinkage, while firms with expanding free cash flow will likely see a deceleration in their growth rate over this period. This premise is founded on the observation that growth typically decelerates more in the early years compared to later ones.
A crucial principle applied in this analysis is the time value of money, implying that a dollar today is worth more than a dollar in the future. To reach an accurate present value estimate, it's necessary to discount the total of these future cash flows.
Analysts have set a price target for Dollar General at $152, which is 26% less than the fair value estimate derived from this analysis. This disparity further highlights the potential undervaluation of Dollar General's shares. However, it should be noted that different valuation techniques can produce varying results and each has its unique set of pros and cons.
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