Retail Stocks

Dollar Tree Inc Valuation – February 2017 $DLTR

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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  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 stock analysis showing a specific look at how Dollar Tree Inc (DLTR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Dollar Tree, Inc. is an operator of discount variety stores. The Company operates approximately 13,851 discount variety retail stores. The Company’s segments include Dollar Tree and Family Dollar. The Dollar Tree segment operates 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, Dollar Tree Canada, Deals and Dollar Tree Deals. The Dollar Tree segment includes its operations under the Dollar Tree, Dollar Tree Canada, Deals and Dollar Tree Deals brands, over 10 distribution centers in the United States and over two in Canada, and a Store Support Center in Chesapeake, Virginia. The Family Dollar segment consists of its operations under the Family Dollar brand, over 11 distribution centers and a Store Support Center in Matthews, North Carolina.

DLTR Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DLTR – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $17,967,647,999 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.03 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 187.71% Pass
6. Moderate PEmg Ratio PEmg < 20 28.32 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.57 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.03 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.14 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $2.68
MG Growth Estimate 5.61%
MG Value $52.92
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $38.92
MG Value based on 0% Growth $22.81
Market Implied Growth Rate 9.91%
Current Price $76.02
% of Intrinsic Value 143.65%

Dollar Tree, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.95 in 2013 to an estimated $2.68 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.91% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Dollar Tree, Inc. revealed the company was trading above its Graham Number of $42.08. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 28.32, which was below the industry average of 50.09, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-28.72.

Dollar Tree, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$28.72
Graham Number $42.08
PEmg 28.32
Current Ratio 2.03
PB Ratio 3.57
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2016
Total Current Assets $4,342,400,000
Total Current Liabilities $2,134,200,000
Long-Term Debt $6,938,000,000
Total Assets $16,195,000,000
Intangible Assets $8,621,900,000
Total Liabilities $11,147,300,000
Shares Outstanding (Diluted Average) 236,900,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.68
Jan2016 $1.26
Jan2015 $2.90
Jan2014 $2.72
Jan2013 $2.68
Jan2012 $2.01
Jan2011 $1.55
Jan2010 $1.19
Jan2009 $0.84
Jan2008 $0.70
Jan2007 $0.62
Jan2006 $0.53
Jan2005 $0.53
Jan2004 $0.51
Dec2002 $0.45
Dec2001 $0.36
Dec2000 $0.36
Dec1999 $0.31
Dec1998 $0.24
Dec1997 $0.17
Dec1996 $0.12

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.68
Jan2016 $2.23
Jan2015 $2.60
Jan2014 $2.31
Jan2013 $1.95
Jan2012 $1.48
Jan2011 $1.14
Jan2010 $0.88
Jan2009 $0.70
Jan2008 $0.61
Jan2007 $0.55
Jan2006 $0.51
Jan2005 $0.47
Jan2004 $0.43
Dec2002 $0.38
Dec2001 $0.32
Dec2000 $0.28

Recommended Reading:

Other ModernGraham posts about the company

Dollar Tree Stores Inc. Valuation – October 2015 Update $DLTR
5 Undervalued Companies with a Low Beta – October 2015
The Best Companies of the Retail Industry – August 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
Dollar Tree Inc. Analysis – July 2015 Update $DLTR

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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