Retail Stocks

Dollar Tree Stores Inc. Valuation – October 2015 Update $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 Most Undervalued Companies for the Defensive Investor – September 2015.  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 Stores 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 of $ 1.00. The Company offers a selection of everyday basic products and also supplements these basic, everyday items with seasonal, closeout and promotional merchandise. As of July 06, 2015, the Company operated more than 13,600 stores across 48 states and five Canadian provinces. Its stores operate under the brands of Dollar Tree, Dollar Tree Canada, Deals and Family Dollar. Dollar Tree’s consumable merchandise includes candy and food health and beauty care and everyday consumables, such as paper and chemicals, and in select stores frozen and refrigerated food. The Company’s variety merchandise includes toys, durable housewares, gifts, party goods, greeting cards, softlines and other items. Its seasonal goods include Valentine’s Day, Easter, Halloween and Christmas merchandise.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DLTR – October 2015

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 $14,451,458,200 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.18 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 210.62% Pass
6. Moderate PEmg Ratio PEmg < 20 28.46 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.27 Fail
Score
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 2.18 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.37 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

DLTR value Chart October 2015

EPSmg $2.17
MG Growth Estimate 6.99%
MG Value $48.76
Opinion Overvalued
MG Value based on 3% Growth $31.45
MG Value based on 0% Growth $18.43
Market Implied Growth Rate 9.98%
Current Price $61.72
% of Intrinsic Value 126.58%

Dollar Tree Stores Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the lack of dividends and the high PEmg and PB ratios.  The Enterprising Investor is concerned by 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 based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.48 in 2012 to an estimated $2.17 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 9.98% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

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 Stores 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.

Stage 3: Information for Further Research

DLTR Charts October 2015

Net Current Asset Value (NCAV) -$37.30
Graham Number $20.47
PEmg 28.46
Current Ratio 2.18
PB Ratio 3.27
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

 

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Most Recent Balance Sheet Figures

Total Current Assets $4,524,700,000
Total Current Liabilities $2,073,300,000
Long-Term Debt $8,265,500,000
Total Assets $16,565,100,000
Intangible Assets $8,709,900,000
Total Liabilities $12,518,100,000
Shares Outstanding (Diluted Average) 214,300,000

Earnings Per Share History

Next Fiscal Year Estimate $1.08
Jan15 $2.90
Jan14 $2.72
Jan13 $2.68
Jan12 $2.01
Jan11 $1.55
Jan10 $1.19
Jan09 $0.84
Jan08 $0.70
Jan07 $0.62
Jan06 $0.53
Jan05 $0.53
Jan04 $0.51
Dec02 $0.45
Dec01 $0.36
Dec00 $0.36
Dec99 $0.31
Dec98 $0.24
Dec97 $0.17
Dec96 $0.12
Dec95 $0.08

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.17
Jan15 $2.60
Jan14 $2.31
Jan13 $1.95
Jan12 $1.48
Jan11 $1.14
Jan10 $0.88
Jan09 $0.70
Jan08 $0.61
Jan07 $0.55
Jan06 $0.51
Jan05 $0.47
Jan04 $0.43
Dec02 $0.38
Dec01 $0.32
Dec00 $0.28
Dec99 $0.22

Recommended Reading:

Other ModernGraham posts about the company

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
21 Companies in the Spotlight This Week – 5/9/15

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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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