3 Reasons Dollar Tree Stock Makes Good Sense
MarketBeat.com | Oct 07, 2020 01:03AM ET
Dollar Tree (NASDAQ:DLTR) announced plans to hire more than 25,000 new associates this month highlighting yet another opportunity for investors. The more is intended to fill vacancies in stores and distribution centers across the country and should be viewed as a positive for two reasons.
First, Dollar Tree is riding a wave of consumer demand fueled by the pandemic that only slowly ebbing. The second is that hiring in the U.S. this year has been very robust and will help sustain economic activity as we get into the 2021 calendar period.
So, with Dollar Tree on a hiring spree and shares trading near a three-month low, the question becomes “is Dollar Tree a good investment?” and by my reckoning it is.
At these prices, it is offering a discount relative to peers and an opportunity for double-digit capital gains by the end of the year. The company isn’t slated to report calendar 3Q earnings until November but waiting until then to buy into this stock is probably not the best course of action. The new guidance from peer/competitor Big Lots (NYSE:BIG) suggests there is no small amount of momentum in the sector.
h2 The Analysts Are Bullish On Dollar Tree/h2There hasn’t been much chatter out of the analyst’s community of late but I think that will begin to change soon. Despite this, the stock is rated as a buy and trading at a discount relative to consensus. The average target is in the range of $115 or about an 18% upside to the most recent price action. While not noteworthy as a sell-side rating, Moody’s just upgraded the company’s credit rating which should go a long way towards boosting investor sentiment. Moody’s raised the rating a notch based on the company’s performance, ability to generate positive cash flow during the pandemic, and double-digit comp-store sales growth.
According to Moody's Vice President Mickey Chadha:
h2 Dollar Tree Resumes Its Buyback Plans/h2"Dollar Tree has demonstrated continued strong operating performance and cash flow generation despite the headwinds caused by the coronavirus pandemic with double-digit comparable store sales growth at its Family Dollar stores. The upgrade reflects the consistent and sustained improvement in credit metrics through increased EBITDA generation and debt reduction and our expectation that metrics will remain strong with debt/EBITDA sustained below 3.0X,"
And if Moody’s wasn’t enough to inspire confidence in the company’s cash-flow generating abilities Dollar Tree resumed its share buyback plan late last month. The move was not entirely unexpected but is nonetheless good news for investors. There was $800 million left under the authorization when it was announced but there is no telling how many shares have been bought back in the intervening weeks.
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With shares trading near $90, the company could buy back nearly 9 million shares. Looking forward, I expect to see the board make another authorization later this year once this one is completed.
h2 Dollar Tree Is A Value Buy With Growth In The Forecast/h2The Dollar Tree is expecting to see growth in the 3rd quarter, this year and next, and yet it is trading at a discount to its closest peer Dollar General Corporation (NYSE:DG). Dollar Tree is trading with a P/E near 15X earnings compared to Dollar General's 20X earnings setting the company up for an earnings-driven multiple expansion worth 30% or more later this year. Dollar General pays a dividend where Dollar Tree doesn’t, true, but it’s less than 1% and the growth outlook isn’t as positive.
Looking at the charts, the stock is trading pretty flat for the year while Dollar General is up more than 30%. On a technical basis, it looks like that situation could continue. The stock is having trouble at the short-term moving average and is set up to fall.
The caveat is that a major support level is just below the current price action and will likely hold the market up. Mid-term, I expect the base will continue to build above the $85 level until it gains enough momentum to carry price action above the $100 mark. That may be driven by news out of the sector, econmic data, guidance, the analysts, or results. Regardless, this stock is a buy when it moves back abov
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