Dollar Tree Inc (DLTR, Financial) recently showcased a daily gain of 3%, yet it has experienced a decline of 14.86% over the past three months. With a reported Loss Per Share of 4.62, investors and analysts are keen to understand: Is Dollar Tree modestly undervalued? This analysis delves deep into the financial metrics and intrinsic value of Dollar Tree, aiming to provide a clear perspective on its current stock valuation.
Company Overview
Dollar Tree operates a widespread network of discount stores across the United States and Canada, comprising over 8,400 shops under the Dollar Tree banner and 8,350 under Family Dollar. The company primarily targets suburban markets with the Dollar Tree banner, offering most merchandise at the $1.25 price point, while Family Dollar focuses on consumables priced below $10 in urban, suburban, and rural areas. In fiscal 2023, consumables accounted for 47% of Dollar Tree's sales, variety items about 45%, and seasonal items over 5%.
The current stock price of Dollar Tree stands at $122.36, with a market cap of $26.70 billion. When compared to the GF Value of $159.07, an estimation of its fair value, Dollar Tree appears modestly undervalued. This valuation discrepancy prompts a deeper investigation into the factors influencing its market position and potential investment opportunities.
Understanding the GF Value
The GF Value is a proprietary measure calculated based on historical trading multiples, a GuruFocus adjustment factor from past performance, and estimated future business performance. This metric suggests a fair trading value for Dollar Tree's stock, which currently is below this threshold, indicating potential undervaluation.
The GF Value serves as a benchmark, suggesting that if the stock price is significantly below this line, the potential for future returns is higher. Given Dollar Tree's current market price, the stock is positioned for potentially attractive returns relative to its intrinsic growth and past business performance.
Financial Strength and Risk Assessment
Assessing financial strength is crucial in mitigating the risk of permanent capital loss. Dollar Tree's cash-to-debt ratio stands at 0.07, indicating a weaker position compared to 87.62% of its industry peers. This factor, combined with an overall financial strength rating of 5 out of 10, suggests that while Dollar Tree maintains a fair level of financial health, there are areas of vulnerability that require careful consideration by investors.
Profitability and Growth Prospects
Dollar Tree has demonstrated profitability over the past decade, with a revenue of $30.60 billion in the last twelve months. However, its operating margin of 0.61% is below industry standards. The company's growth metrics also present a mixed picture, with a 3-year average annual revenue growth rate of 9.1%, outperforming 65.42% of its competitors. Yet, its EBITDA growth rate stands at 0%, highlighting areas for potential improvement.
ROIC vs. WACC: A Critical Indicator of Efficiency
A comparative analysis of Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC) reveals that Dollar Tree's ROIC of 0.92 is significantly lower than its WACC of 7.07, indicating inefficiencies in generating sufficient returns on invested capital.
Conclusion
While Dollar Tree (DLTR, Financial) displays signs of modest undervaluation based on its GF Value, the company's financial health and profitability suggest cautious optimism. Investors should consider both the potential for higher long-term returns and the inherent financial risks. For a deeper exploration of Dollar Tree's financials, visit its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
