If discount shopping is your thing, don’t ignore DLTR

October 1, 2018

If discount shopping is your thing, don’t ignore DLTR

I write a lot about value investing in this space; each day, I like to try to to identify areas of the market where I think good value lies, as well as where some significant investment risks lie. If you listen to a lot of talking heads on TV, when a popular, well-known stock starts to drop in price, you’ll almost always start hearing about what a great deal the stock is at that price, and how you should “buy the dip” to take advantage of the next swing upward. For a lot of stocks in the market for the last several years, that approach has yielded some big returns because the broad market’s upward trend has been so strong; but for a large number of the stocks, diving into the actual fundamentals and critical measurements of what a company is actually worth, the truth is actually different than what those talking heads would have you believe.

I differ from talking heads, because I’m not trying to get attention with the latest sound bite; more often than not, I think the real objective they have is to keep you watching their programs rather than giving you actual, useful and unbiased information. The easiest way to keep people glued to the television is to talk about the areas of the market that everybody is paying attention to anyway. If there’s one thing that the market has consistently proven over time to hate, it’s change, which means that the longer the talking heads can keep people buying into the status quo, the better off they – and the media that employs them – are going to be.

I’m more interested in being a functional investor than anything else; that also means that when I write about the market, it’s important to me that the things I write about help other people to make better, more educated decisions about the investments they make. You don’t have to agree with me, but if I can give you some extra food for thought, and help you consider the risk versus reward of an investment you’re considering more carefully and effectively, then I’ve accomplished my objective.



Value investing, at its core, is really about trying to identify stocks that are available right now at prices that are significantly lower than what their business is actually worth. Warren Buffet, the Oracle of Omaha and perhaps the most famous living value investor in the world, likes to call value investing “buying a good company at a nice price.” That’s an interesting description, and perhaps that’s why I’ve always thought about value investing like digging through the clearance rack at a department store. You’ll probably pass over the vast majority of items you actually look at, or sometimes not get anything at all; but if you find one item on that rack you like, you’ll probably feel pretty good about it, because you will have been able to buy it at a much better price than full retail value.

In the retail industry, there is an entire sub-industry built on this same premise. You probably already know about a lot of the stocks that make up this industry, or at least I’m willing to bet that you’ve spent a little bit of time in some of their stores, like TJ Maxx for TJX Companies (TJX), Ross Stores (ROST), and Burlington Coat Factory for Burlington Stores (BURL). The stock I’m headlining today, Dollar Tree, Inc. (DLTR) operates in yet another niche of that sub-industry, discount variety stores. Is it kismet that a store that offers a wide range of useful products at extreme discounts also happens to be a deeply discounted stock right now? Maybe – you get to decide for yourself.



Fundamental and Value Profile

Dollar Tree, Inc. is an operator of discount variety stores. As of January 28, 2017, the Company operated 14,334 stores in 48 states and the District of Columbia, and five Canadian provinces. Its segments include Dollar Tree and Family Dollar. The Dollar Tree segment is the operator of discount variety stores offering merchandise at a fixed price. The Family Dollar segment operates a chain of general merchandise retail discount stores providing consumers with a selection of merchandise in neighborhood stores. Its stores operate under the names of Dollar Tree, Family Dollar and Dollar Tree Canada. As of January 28, 2017, the Dollar Tree segment included 6,360 stores operating under the Dollar Tree and Dollar Tree Canada brands, 11 distribution centers in the United States and two in Canada and a Store Support Center in Chesapeake, Virginia, and 11 distribution centers and a Store Support Center in Matthews, North Carolina under the Family Dollar brand. DLTR’s current market cap is $19.4 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased by a little over 16%, while sales increased a little more than 4.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable over the long-term. It is also a mark, however of management’s ability to maximize its business operations. DLTR operates with a pretty narrow margin profile; over the last twelve months, with Net Income that was 7.5% of Revenues. In the last quarter, that number narrowed as Net Income decreased to a little less than 5% of Revenues.
  • Free Cash Flow: DLTR’s free cash flow for the trailing twelve months is generally healthy, at a little more than $846 million. That translates to a Free Cash Flow Yield of 4.3%.
  • Debt to Equity: DLTR has a debt/equity ratio of .66. This is a conservative number that reflects a conservative approach to leverage. The company doesn’t have a lot of liquidity, with about $647 million in cash and equivalents against about $5 billion in long-term debt; however their balance sheet indicates operating profits are more than sufficient to service their debt.
  • Dividend: Like most stocks in the retail sector, DLTR does not pay a dividend.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DLTR is $32.15 per share and translates to a Price/Book ratio of 2.53 at the stock’s current price. DLTR’s Book Value has increased steadily since the last quarter of 2013 from around only $4 at that time. Their historical Price/Book average is 4.03, which means that the stock is discounted by nearly 60% of the levels the market has historically priced the stock at. That puts the stock’s long-term target price above $129, which is higher than even the stock’s all-time high, reached in January of this year around $116 per share. I’m not quite that bullish on this stock, but it does offer a pretty compelling reason to suggest the stock could revisit that all-time high again.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend since the end of January to that trend’s bottom, reached in early September at around $79 per share. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock rallied from that point until just a few days ago before starting to drop back again and is now just a couple of dollars away from that low point, which should offer a pretty significant support level for the stock. The most immediate resistance level is around $88 prom the pivot high reached in mid-June, with major resistance at around $93.50 based on the downward trend’s 38.2% retracement line. A drop below the support offered around $79 could see the stock drop to around $72 per share before finding its next support level.
  • Near-term Keys: If the stock can pivot off of support again, a rally to even the the $88 resistance level offers an interesting short-term bullish trading opportunity either with call options or by buying the stock outright. If the stock does break below support, and you like the idea of working with the bearish side, you might consider shorting the stock or buying put options. If you prefer to take a long-term view, and don’t dealing with a stock that clearly has some volatility to it, the stock’s value proposition right now dovetails nicely with the stock’s price action since the beginning of the year.