Dollar Tree Inc (DLTR, Financial) recently experienced a daily loss of -10.11%, and a 3-month loss of -17.09%. Despite these figures, the company's Earnings Per Share (EPS) (EPS) stands at 6.19. This raises the question: Is the stock modestly undervalued? To answer this question, we'll delve into a detailed valuation analysis. Read on to explore the intrinsic value of Dollar Tree (DLTR) and determine if it's the right time to invest.
Introducing Dollar Tree Inc (DLTR, Financial)
Dollar Tree operates discount stores across the U.S. and Canada, boasting 8,134 shops under its namesake banner and 8,206 Family Dollar units as of the end of fiscal 2022. The company offers branded and own-label goods, with items priced from $1 to $10. It generated nearly 50% of its fiscal 2022 sales from variety items, around 45% from consumables, and just over 5% from seasonal goods.
With a current stock price of $127.85 and a GF Value of $146.22, Dollar Tree's stock appears to be modestly undervalued. This discrepancy between the stock price and the GF Value suggests that there may be potential for growth.
Understanding the GF Value
The GF Value is a unique measure that estimates the current intrinsic value of a stock. It considers historical trading multiples, an adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should ideally be traded at.
According to our valuation method, Dollar Tree (DLTR, Financial) is modestly undervalued. If the stock price is significantly above the GF Value Line, the stock may be overvalued, leading to poor future returns. Conversely, if the stock price is significantly below the GF Value Line, the stock could be undervalued, potentially leading to higher future returns.
Given that Dollar Tree is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength of Dollar Tree
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Dollar Tree's cash-to-debt ratio stands at 0.09, which ranks worse than 80.54% of 298 companies in the Retail - Defensive industry. Based on this, GuruFocus ranks Dollar Tree's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth of Dollar Tree
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. Dollar Tree has been profitable 9 out of the past 10 years. With an operating margin of 6.69%, it ranks better than 79.61% of 304 companies in the Retail - Defensive industry. Overall, the profitability of Dollar Tree is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. Dollar Tree's 3-year average annual revenue growth rate is 8.5%, which ranks better than 64.81% of 287 companies in the Retail - Defensive industry. The 3-year average EBITDA growth rate is 18.8%, which ranks better than 72.83% of 254 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, Dollar Tree's ROIC is 7.31 while its WACC stands at 6.97.
Conclusion
In conclusion, the stock of Dollar Tree (DLTR, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 72.83% of 254 companies in the Retail - Defensive industry. To learn more about Dollar Tree stock, you can check out its 30-Year Financials here.
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