Dollar General’s 30% Stock Crash Makes These Alternatives Look Like Bargain Deals

If you are a Dollar General (NYSE:DG) investor reeling from the stock’s 30% plus drop on Thursday after it slashed its full-year revenue growth and profit forecasts, it might be time to look elsewhere. As of this moment, we find that Brookfield Infrastructure Partners (NYSE: BIP) – a player engaged in the acquisition and management of infrastructure assets – and Ryder Systems (NYSE:R) – a U.S.-based transportation and logistics company – as more attractive buys than Dollar General.

Why? Simply because the valuation and growth numbers tell us so. Brookfield Infrastructure Partners and Ryder System stocks have both seen higher growth in revenue and operating profits than Dollar General in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Dollar General.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than DG – BIP & R Stocks?

Specifically, to illustrate the opportunity for Brookfield Infrastructure Partners LP, you pay $3.46 per dollar of earnings-before-interest-and taxes (EBIT) for BIP stock versus $8.2 for DG, and get higher annual growth (24.1% vs 2.2%), higher quarterly growth (23% vs 6.1%), and a better margin trend (-0.6% vs -2.9%). Overall, you get higher revenue, and operating profit growth from Brookfield Infrastructure Partners and Ryder System, and pay less than DG stock. See our complete analysis of Better Bets Than DG Stock

So What’s The Catch?

Now, could Dollar General buck the trend? Could it grow its revenues and profits much faster than Brookfield Infrastructure Partners or Ryder System in the coming quarters? Of course that’s possible. DG has been seeing its customers – who are primarily lower-income households – cut back on essential goods amid rising costs of other essentials like rent and healthcare in the current inflationary environment. However, there could be a silver lining. Dollar General could see its business hold up better in the event of a potential economic recession, given that customers often shift towards buying less expensive items while increasing spending in dollar stores and discount retailers. The company is also known for its tight cost controls and efficient supply chain management and this could help the company eventually bolster profits.

The data below shows both Brookfield Infrastructure Partners and Ryder System outperformed Dollar General recently and over the last year. They might repeat this. Related ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Dollar General, To Get More Revenue And Profit Growth?

While BIP has seen the strongest revenue growth of the three in the last twelve months and the last quarter, DG has seen the slowest growth over the period. Moreover, BIP margins have declined less than DG margins over the last twelve months. However, despite this, DG stock trades at a higher price-to-operating income ratio of almost 8x, compared to levels of roughly 3.5x for BIP.

What About Relative Market Returns?

R stock has shown a stronger market performance, with returns of 25.5% over the past 6 months, and 44% over the past 12 months. In comparison, DG returns for the same periods were weaker at -43%, and -46%, respectively. BIP also performed better than DG stock.

How Did These Metrics Look 1 Year Ago – Could DG’s Combination Of Higher Valuation & Lower Growth Persist?

DG still had a higher valuation of $11.14 vs $4.51 for BIP but lower annual growth (11.2% vs 24.2%), lower quarterly growth (6.8% vs 23.7%), and less favorable margin change (-0.2% vs -0.06%). The situation looks quite different now which means that market reward could switch in favor of BIP and R.

Investment Thesis for Brookfield Infrastructure Partners and Ryder Systems

Brookfield Infrastructure Partners has a wide portfolio of infrastructure assets including energy generation, utilities, data centers, and transportation infrastructure such as toll roads. The wide variety of assets, which are geographically distributed, provide considerable diversification for investors. Moreover, many of the company’s assets – including utilities – are monopolies of sorts and also have long-term pricing contracts, translating into considerable cash flow stability.

Ryder System is a leading player in the logistics and transportation services space. The company provides a wide range of services, including dedicated transportation, freight brokerage, e-commerce fulfillment, and last-mile delivery. Ryder has a base of over 40,000 customers and has increasingly focused on optimizing its operations via maintenance cost cuts and better leasing economics. The company has also been divesting business in underperforming regions to focus on its core U.S. business while moving towards a more asset-light model. Such moves could help the company boost its cash flow profile and valuation.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/30/2024
[2] Cumulative total returns since the end of 2016

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