Is This Discount Retailer Priced at a Discount?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dollar Tree (NASDAQ: DLTR) stock has had a bit of a roller-coaster ride in the last few years. After rallying over 500% since 2008 and reaching a peak of about $56, the stock has now been knocked down to around $39. This discount variety retailer, with over 4000 stores in the US, has been able to profit from bargain-hungry consumers who have felt the pinch of the global economic crisis. With the recent drop in share price, it appears as if the company is priced attractively once again.

Earnings

While earnings growth has trailed the industry for the last five years or so, EPS has been growing steadily since 2008. In fact, the company's earnings increased by a whopping 242% in this period. The $0.51 Dollar Tree reported over Q2 represented an 8.7% earnings beat, and according to analysts such as Grom, the industry's outlook is pretty good for the rest of the year. With a free cash flow of $436 billion in 2011, the company should be able to fund acquisitions as well as develop new products.

Valuation and Metrics

Things also looking good for Dollar Tree in terms of valuation. With a P/E of 17.5x the stock is available at a discount to the 20.2x industry average. While the price to book appears high at 5.76, it is still lower than the industry average of 8.22. Dollar Tree has a comfortable operating margin of 11.8% and a fine return on equity of 34.53%. For comparison, competitors Dollar General (NYSE: DG) and Family Dollar (NYSE: FDO) and both priced at just over 18x earnings. Dollar General is Dollar Tree's biggest competitor with over 9000 stores, while Family Dollar operates around 7000 stores. Of these two competitors, Family Dollar is the most succesful with EPS growth outpacing the industry in 2012. Dollar General is up 17.38% in the last twelve months however, compared to Family Dollars 9.48% and Dollar Tree's drop of 2.61%. 

Price Drop

The recent drop in stock price is largely due to the company reaffirming soft guidance for the rest of the year. While Dollar Tree only adjusted its outlook by about 2%, it was punished by the market to the tune of 10%. Management cited consumer spending and high gas prices as a drag on profits, but overall it expects healthy earnings growth in the coming years as consumers increasingly hunt for cheaper products in these uncertain economic times.

Bottom Line

Overall, Dollar Tree seems like a solid bet to me, although it isn't exactly a bargain yet in terms of valuation. Earnings have been steadily rising in the last few years, and with the recent tumble in stock price, the company's valuation seems a lot more reasonable. While the company has a number of competitors, its free cash flow should allow it to remain competitive in the years to come. Moreover, with a beta of only .36, the stock should be attractive for investors hoping to avoid volatility.  


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Family Dollar Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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