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Retail Stocks

Dollar Tree Inc. Quarterly Valuation – October 2014 $DLTR

logo (2)Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor – October 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Dollar Tree Inc. (DLTR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price. As of January 28, 2012, the Company operated 4,351 discount variety retail stores. Its stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills. As of January 28, 2012, it operated 4,252 stores in 48 states and the District of Columbia, as well as 99 stores in Canada. It buys approximately 58% to 60% of its merchandise domestically and imports the remaining 40% to 42%. Its domestic purchases include basic, seasonal, closeouts and promotional merchandise. It maintains a selection of products within variety store categories. During the fiscal year ended January 28, 2012 (fiscal 2011), the Company opened 278 new stores.
DLTR Chart

DLTR data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 -PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $59.84
MG Value $100.72
MG Opinion Undervalued
Value Based on 3% Growth $37.93
Value Based on 0% Growth $22.24
Market Implied Growth Rate 7.19%
Net Current Asset Value (NCAV) -$0.17
PEmg 22.87
Current Ratio 2.12
PB Ratio 8.54

Balance Sheet – July 2014

Current Assets $1,663,000,000
Current Liabilities $783,000,000
Total Debt $757,000,000
Total Assets $3,147,000,000
Intangible Assets $170,000,000
Total Liabilities $1,699,000,000
Outstanding Shares 206,600,000

Earnings Per Share

2014 (estimate) $2.95
2013 $2.72
2012 $2.68
2011 $2.01
2010 $1.55
2009 $1.19
2008 $0.84
2007 $0.70
2006 $0.62
2005 $0.53
2004 $0.53

Earnings Per Share – ModernGraham

2014 (estimate) $2.62
2013 $2.31
2012 $1.95
2011 $1.48
2010 $1.14
2009 $0.88

Dividend History
Dollar Tree does not pay a dividend.

Conclusion:

Dollar Tree is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of dividend payments and the high PEmg and PB ratios.  The Enterprising Investor’s only concern is the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.14 in 2010 to an estimated $2.62 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 7.19% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Dollar Tree Inc. (DLTR) for a better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Dollar Tree Inc. (DLTR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Dollar Tree Inc. (DLTR) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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