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Should Value Investors Consider Dollar Tree (DLTR) Stock Now?

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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Dollar Tree, Inc. (DLTR - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Dollar Tree has a trailing twelve months PE ratio of 23.81, as you can see in the chart below:
 

Zacks Investment ResearchImage Source: Zacks Investment Research

This level compares favorably with the market at large, as the PE for the S&P 500 stands at about 24.32. If we focus on the long-term PE trend, Dollar Tree’s current PE level puts it above its midpoint over the past five years.
 

Zacks Investment ResearchImage Source: Zacks Investment Research

Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 28.49. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
 

Zacks Investment ResearchImage Source: Zacks Investment Research

However, we should point out that Dollar Tree has a forward PE ratio (price relative to this year’s earnings) of 25.31, so we might say that the forward earnings estimate suggests that the company’s share price will likely appreciate in the near term.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Dollar Tree has a P/S ratio of about 1.22. This is lower than the S&P 500 average, which comes in at 5.05 right now. As we can see in the chart below, this is above the median for this stock in particular over the past few years.
 

Zacks Investment ResearchImage Source: Zacks Investment Research

If anything, Dollar Tree is towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Dollar Tree currently has a Zacks Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Dollar Tree a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/CF ratio (another great indicator of value) comes in at 16.31, which is better than the industry average of 18.08. Clearly, DLTR is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Dollar Tree might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of D and a Momentum score of D. This gives DLTR a Zacks VGM score—or its overarching fundamental grade—of D. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mostly trending higher. The current fiscal year has seen six estimates go higher in the past sixty days compared to one lower, while the next fiscal year estimate has seen ten upward and zero downward revisions in the same time period.

As a result, the current fiscal year consensus estimate has inched up by 0.7% in the past two months, while the next fiscal year estimate has increased 19.1%.

Even though Dollar Tree has a better estimates trend, the stock has just a Zacks Rank #3 (Hold). That is why we are looking for in-line performance from the company in the near term.

Bottom Line

Dollar Tree is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a solid industry rank (among the Top 22%), Dollar Tree looks like a strong value contender. In fact, over the past three years, the industry has outperformed the broader market, as you can see below:
 

Zacks Investment ResearchImage Source: Zacks Investment Research

So, despite a Zacks Rank #3, we believe that bullish analyst sentiment and favorable industry factors make this stock a compelling value pick.


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