Does Money Grow on Dollar Tree?

04/18/2016 8:00 am EST

Focus: STOCKS

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

The stocks in our Growth Portfolio have bullish charts, strong projected earnings growth, low-to-moderate P/Es and low-to-moderate debt levels, explains Crista Huff, editor of Smart Investing in Turbulent Times.

Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. The stores sell basic merchandise — food, housewares, toys, etc. —  enhanced by an assortment of seasonal and closeout products, all at the fixed price of $1.

There are three major things that Dollar Tree did in recent years to attract more customers and grow earnings.

The firm dramatically increased store count; it also introduced frozen and refrigerated foods in two-thirds of its stores; and it purchased Family Dollar Stores (FDO).

The acquisition, completed in July 2015, more than doubled store count to over 13,600 retail stores the US and Canada. The process of merging and optimizing the acquisition is expected to take about three years.

Dollar Tree is expecting $300 million in cost synergies within three years of the merger’s completion.

These profit enhancements are contributing to significant consensus earnings growth expectations of 28.5% and 23.8% in fiscal 2017 and 2018.

Every 1% increase in Family Dollar margins results in a 7% increase in Dollar Tree earnings, which helps explain why EPS are growing so aggressively.

The 2017 p/e ratio is 22.1, indicating that the stock is undervalued based on both this year’s and next year’s profits. The stock does not pay a dividend.

There’s strong price support at $75, established both last summer and this winter, so that’s your likely downside if a market correction pulls DLTR down.

The fundamentals are strong, and the stock chart is more bullish than most US stocks right now. I’d say Dollar Tree fits the bill for a winning stock in 2016. I would absolutely buy now.

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By Crista Huff, Editor of Smart Investing in Turbulent Times

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