One of Wall Street's biggest winners of the day is Dollar Tree, a department store company whose shares have climbed 4.9% to a price of $143.25 -- 6.94% below its average analyst target price of $153.93.
The average analyst rating for the stock is buy. DLTR may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 29.0% over the last year, returning -11.9%.
Dollar Tree, Inc. operates discount variety retail stores. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Dollar Tree's trailing 12 month P/E ratio is 23.5, based on its trailing EPS of $6.09. The company has a forward P/E ratio of 19.6 according to its forward EPS of $7.3 -- which is an estimate of what its earnings will look like in the next quarter.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Dollar Tree's PEG ratio of 1.74 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of Dollar Tree's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
DLTR's gross profit margins have averaged 30.3% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 1.4%. Dollar Tree's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 1,614,800 | -1,253,800 | 361,000 | -11.67 |
| 2022-01-31 | 1,431,500 | -1,022,800 | 408,700 | -77.51 |
| 2021-01-31 | 2,716,300 | -898,800 | 1,817,500 | 118.16 |
| 2020-01-31 | 1,869,800 | -1,036,700 | 833,100 | n/a |
- Average free cash flow: $855.08 Million
- Average free cash flown growth rate: -18.9 %
- Coefficient of variability (lower numbers indicating more stability): 79.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, DLTR is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Dollar Tree's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
Dollar Tree is by most measures overvalued because it has an average P/E ratio, an average P/B ratio, and generally positive cash flows with a downwards trend. The stock has strong growth indicators because it has a an inflated PEG ratio and strong margins with a stable trend. We hope you enjoyed this overview of DLTR's fundamentals.
