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Dollar Tree, Inc. (NASDAQ: DLTR ) has struggled in recent weeks. After reporting strong but somewhat disappointing numbers, Dollar Tree stock sold off en masse, falling $15 per share in one day.
However, this temporary pessimism may have created a buying opportunity. With low valuations, growth at high levels and the possibility of improved conditions, investors should take a look at DLTR stock.
Extreme Discounters Still Attract Shoppers
My colleague Josh Enomoto described Dollar Tree as a company dependent on "a healthy stream of tight-fisted people." He went on to state that as incomes increase, demand for the premium goods not found at Dollar Tree also increases.
He makes an excellent point. In the depths of the last economic downturn, I visited Dollar Tree often. Now that I have become a little better off, I go less. This behavior has put both DLTR and its peers in an "industry recession," or at least as close to a downturn as this industry sees.
Stores such as Dollar Tree operate in what many would describe as the "discount sector of the discount sector," sometimes called the "extreme discount" sector. They serve a different industry segment than stores run by Walmart Inc (NYSE: WMT ) or Target Corporation (NYSE: TGT ).
Although brand names sometimes appear, these stores tend to sell discounted or off-brand merchandise which retailers can obtain at a very low cost. DLTR needs such items to fulfill its commitment to sell items at $1 or less. Still, such consumers exist in all stages of an economic cycle. Hence, Dollar Tree stock can rely on a steady base.
Dollar Tree Has Performed Well During Its "Recession"
This so-called "recession" could end sooner rather than later for Dollar Tree. The growth cycle we now enjoy began nine years ago. Changes in economic cycles remain difficult to predict. Still, nine years of growth indicates the economy has reached a late stage in the growth cycle.
When the economy turns negative (and it always does eventually), Dollar Tree, as well as peers such as Dollar General Corp. (NYSE: DG ) and Big Lots, Inc. (NYSE: BIG ), will again benefit.
Even now in a boom cycle, the company performs well. Revenue for fiscal 2018 came in at $22.25 billion, 7.3% over 2017 levels. The company earned a profit of $7.21 per share in fiscal 2018, nearly double 2017 levels. Analysts project earnings growth will remain in the double digits through at least 2022.
Low Valuation for DLTR Stock
The current price-to-earnings (P/E) ratio stands at about 13.7. My guess as to why the P/E has fallen to these levels stems from the view of Mr. Enomoto and others that shoppers avoid the extreme discount sector in a booming economy.
The stock trades about 14% lower than its 52-week high. Much of that loss came after the company disappointed Wall Street in its March earnings report. 4Q 2017 earnings came in at $1.89 share when analysts had expected $1.90 per share. Revenue also missed by $40 million, and the same-store sales increase of 2.4% came in lower than expected.
I agree with Lawrence Meyers that the $15 per share selloff was " overdone ." In my view, investors should treat that skepticism as a chance to buy. If we've reached the late stages of the growth cycle, the coming recession will usher in a relative growth cycle for Dollar Tree stock. If that occurs, analysts will likely revise earnings estimates higher, making DLTR stock even more of a bargain.
Bottom Line on Dollar Tree Stock
The recent selloff has created a buying opportunity in Dollar Tree stock that investors should consider. Because of the strong performance of the economy, DLTR suffers from an "industry recession" where its lower-cost goods tend to fall out of favor. However, the recent drop in the stock price has taken the multiple below 14 times earnings.
Moreover, since economic growth has occurred for several years, the economy could again turn downward soon. Such a move would increase earnings and send the stock higher. In such an economy, investors have few options for finding stocks during a "downturn." Dollar Tree will become that stock, and investors should buy while they can get in cheap.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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