Dollar Tree: A Growth Story?

Focus: Consumer

Jack Adamo Image Jack Adamo Editor, Jack Adamo's Insiders Plus

I must admit that with the market so overvalued, I'm reluctant to buy anything, even at a reasonable price. Nevertheless, I am recommending Dollar Tree (DLTR), the largest chain in what is called the retail discount & variety sector, notes Jack Adamo, editor of Insiders Plus.

Unlike most other "dollar" stores, Dollar Tree sells every item in its store at the same $1 price. One might reasonably question how a store can make money that way, but the fact is that Dollar Tree does. It has grown same-store sales for 37 consecutive quarters and full-year earnings for the last year grew 9%.

That's not high growth, but it's darn good, especially considering most stock indices showed shrinking earnings in 2015 & 2016. So, while it isn't the sexiest stock you'll ever see, it certainly merits a closer look.

The shares are selling at 18-times GAAP earnings, or 17-times trailing earnings, excluding an impairment charge which I think will be recovered. That being the case, it's nice to buy something whose stock price is in line with its earnings.

The company took on a lot of debt to acquire Family Dollar Stores in 2014. However, operating cash flow is very strong at two times earnings. Free cash flow (that is, after capital expenditures) is 50% higher than earnings.

Moreover, management has used the cash wisely, paying off 10% of its debt last year. Dollar Tree pays no dividend yet. All its cash is going into debt reduction or upgrading its stores, especially those it acquired.