The stock of Dollar Tree Inc (DLTR, Financial) has experienced a daily loss of 1.17%, with a 3-month loss of 13.58%. Despite these losses, the company boasts an Earnings Per Share (EPS) of 5.5. Given these figures, the question arises: Is Dollar Tree (DLTR) modestly undervalued? This article provides a comprehensive valuation analysis to answer this question, offering valuable insights for potential investors.
Company Overview
Dollar Tree Inc (DLTR, Financial) operates discount stores across the U.S. and Canada, with over 16,000 stores under its Dollar Tree and Family Dollar banners. The company offers a variety of products, ranging from consumables and variety items to seasonal goods, at affordable prices. Despite the recent losses, Dollar Tree's stock price stands at $123.1, while its GF Value, an estimation of fair value, is $150.6. This discrepancy suggests that Dollar Tree (DLTR) may be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that estimates the intrinsic value of a stock. It considers historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
With a current market cap of $27.10 billion and a stock price of $123.1 per share, Dollar Tree (DLTR, Financial) appears to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
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 investing. Dollar Tree's cash-to-debt ratio of 0.05 ranks worse than 89.51% of 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
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. Dollar Tree has been profitable 9 out of the past 10 years, with a revenue of $29.30 billion and Earnings Per Share (EPS) of $5.5 over the past twelve months. Its operating margin of 5.82% ranks better than 76.07% of companies in the Retail - Defensive industry. Overall, GuruFocus ranks the profitability of Dollar Tree at 7 out of 10, indicating fair profitability.
Growth is a crucial factor in the valuation of a company. Dollar Tree's 3-year average annual revenue growth of 8.5% ranks better than 64.58% of companies in the Retail - Defensive industry. Its 3-year average EBITDA growth rate is 18.8%, ranking better than 73.23% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted average cost of capital (WACC) provides another perspective on its profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Dollar Tree's ROIC is 6.37, and its WACC is 6.75.
Conclusion
In summary, Dollar Tree (DLTR, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 73.23% of companies in the Retail - Defensive industry. For more information about Dollar Tree stock, check out its 30-Year Financials here.
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