Is Dollar Tree (DLTR) a Suitable Stock for Value Investors?

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 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 17.68, as you can see in the chart below:

This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 20.34. If we focus on the long-term PE trend, Dollar Tree’s current PE level puts it below its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting that the stock is undervalued compared to its historical levels.

Further, the stock’s PE also compares favorably with the Zacks classified Retail-Discount & Variety industry’s trailing twelve months PE ratio, which stands at 22.58. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Dollar Tree has a forward PE ratio (price relative to this year’s earnings) of 15.51, so it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term too.

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 0.78. This is lower than the S&P 500 average, which comes in at 3.15 right now.

If anything, DLTR is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Dollar Tree currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes DLTR a good choice for value investors.

For example, the PEG ratio for Dollar Tree is just 0.95, a level that is lower than the industry average of 1.72. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. 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 ‘A’ and a Momentum score of ‘b’. This gives DLTR a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current year has seen one upward estimate revision in the past sixty days compared to four downward, while the next year estimate has seen three upward and four downward revisions in the same time frame.

As a result, the current year consensus estimate has moved down by 0.7% in the past two months, while the next year estimate has inched higher by 0.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Dollar Tree, Inc. Price and Consensus

Dollar Tree, Inc. Price and Consensus | Dollar Tree, Inc. Quote

 

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and 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. Furthermore, a good industry rank (among the Top 41%) instills investor confidence. However, with a Zacks Rank #3 it is hard to get too excited about this company. Also, over the past one year, the Zacks Retail-Discount & Variety industry has underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn favorable in this name first, but once that happen, this stock could be a compelling pick.

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