Dollar General (DG) Named Best Idea at Deutsche Bank, Price Target Raised to $86 (FDO)

Deutsche Bank maintained a Buy rating on Dollar General (NYSE: DG) and raised its price target to $86.00 (from $73.00), Analyst Paul Trussell called in his Best Idea for 2015. He also noted significant upside if its is successful in acquiring Family Dollar Stores (NYSE: FDO). Trussell thinks Dollar General will raise its bid to the low to mid $80’s in the next few weeks.

"If, and it's a very big if, DG is successful in acquiring FDO, we believe the combined entity could produce up to $7 in EPS by FY18. By our calculations, that equates to ~$2.5B equity value over time, as we apply a conservative 16x forward multiple supported by a strong management team known for execution and a macro backdrop favorable for retailers catering to low-to-middle- income customers," said Trussell.

"We believe the DG/FDO deal is worth ~$1.15/share as originally laid out, reflecting synergies of $550M. However, as synergies are actually understated by $200-$300M in our view, we think value could in fact be upwards of $1.50- $1.75, depending on how many stores need to be sold. In our base case of 2,500 divestitures (from 1,500 previously) and a closing date at the end of 2Q15, we calculate ~$0.50 in net accretion (8% upside vs. our DG standalone forecast), or ~$1.00 (16% upside) in the higher synergy scenario. Importantly, we believe that every 1,000 stores divested would result in a ~$0.25 net impact to accretion in the synergy base case. All told, we conservatively arrive at FY16 EPS of $4.50. Looking out at FY17, and assuming on track for a conservative $550M in synergies by the end of year 3, we are modeling $5.90 in EPS based on 2.3% SSS and a 10.2% EBIT margin," continued the analyst.

"In our view, DG is likely to raise its offer for FDO over the next few weeks, taking its bid to the low to mid $80’s in order to maintain a high single-digit spread against DLTR’s bid (which has risen due to the strong equity move the last few months). In addition, we expect DG to outline its willingness to divest more than 1,500 stores. By mid-February, we believe DG will have enough information from the FTC to alter its language to ‚hell or high water‛ which should lead to an eventual agreement. Our pro forma model is based on a deal closing at the end of 2Q15," he added.

For an analyst ratings summary and ratings history on Dollar General click here. For more ratings news on Dollar General click here.

Shares of Dollar General closed at $70.25 yesterday.

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