Investors don’t need to look too far for evidence of economic concerns. Most conspicuously, the seemingly relentless mass layoffs make discount retailers like Dollar Tree (NASDAQ:DLTR) look mighty attractive. To be fair, though, the current print implies the company runs an overvalued enterprise. Nevertheless, the hard data suggests naysayers may be missing out on an upside opportunity. I am bullish on DLTR stock.
Fundamentally, the broader economic narrative bodes cynically well for DLTR stock. As stated above, the wide distribution of pink slips imposes significant pressures on consumer sentiment, which already ranks very low. However, it’s the nature of the layoffs – that is, the core demographic impacted – that has many investors worried.
With the much-covered headcount reductions, the headlines don’t focus on throwaway jobs that anybody can perform. Rather, those making up the unemployment lines stand technology workers or occupations that require extensive education, experience, and acumen. Though small in number, these employees contribute massively to the broader economy through their spending power.
With that diminishing rapidly, DLTR stock will likely become the cynical beneficiary of the trade-down effect. Basically, consumers will trade down the quality quotient of their product/service purchases until a desirable equilibrium can be reached. Therefore, patrons of premium fine-dining establishments may trade down to, say, an Applebee’s.
However, with a job loss (discounting severance packages and unemployment checks), this natively involves a zero-income framework. Effectively, this means that the trade-down effect may be even more severe, thus potentially lifting DLTR stock.
DLTR Stock Analysis
Supporting the bull case, on TipRanks, DLTR stock has a ‘Perfect 10’ Smart Score rating. This indicates high potential for the stock to outperform the broader market.
DLTR Stock Faces Both Risks and Rewards
While the upside narrative for DLTR stock seemingly sells itself at the present juncture, it’s not without faults. Specifically, many critics will point out that the underlying investment rates as overvalued. At the moment, this criticism carries weight. However, the broader data suggests that the naysayers may be missing the forest for the trees.
Let’s get right into it. Based on valuations associated with discounted cash flow (DCF) analysis, the fair value of DLTR stock pings at $89.64. At writing, Dollar Tree shares trade hands at slightly over $149. Therefore, DLTR is considered overvalued. Admittedly, that’s not an encouraging statistic.
However, Dollar Tree’s revenue over the last several quarters indicates that the character of the economy shifted, as in, it shifted very favorably for DLTR stock.
Back between Dollar Tree’s fiscal Q4 2019 to Q3 2020, the company’s year-over-year revenue growth rate averaged 6.71%. Against the one-year-ago comparison (Q4 2018 to Q3 2019), average year-over-year revenue growth sat at 2.45%.
Now, as people became acclimated to COVID-19 in 2021, Dollar Tree’s quarterly revenue growth diminished conspicuously. Between Q4 2020 to Q3 2021, the average sales growth rate pinged at 3.79%. However, from Q4 2021 to Q3 2022, the growth rate now stands at 6.5%.
Here’s the takeaway for DLTR stock. As consumers encounter significant economic difficulties, demand for discount retailers jumps higher. Conversely, as economic conditions improve, consumers choose to shop at more premium places. What the rise in revenue growth indicates over the past four quarters is that consumers are once again hurting.
Dollar Tree Needs a Reset
To be sure, prospective investors of DLTR stock must recognize the risk factors. For instance, the market prices shares at a trailing earnings multiple of 20.5. That’s higher than 62.50% of the competition. However, these numbers are based on past events. To appreciate DLTR now requires a reset in expectations.
Mainly, if these layoffs continue – and there’s no sign of them slowing down – Dollar Tree’s addressable market should rise. Further, if the Federal Reserve insists on raising interest rates to combat rise job growth in other non-tech sectors, this action could slow the economy into recession. Cynically, such a circumstance would really lift DLTR stock.
Therefore, while acknowledging the risk factor of present overvaluation, the other concern is opportunity risk. That is, against incoming recessionary pressures, DLTR stock could actually be fairly valued, if not undervalued.
Is DLTR Stock a Buy, According to Analysts?
Turning to Wall Street, DLTR stock has a Moderate consensus rating based on nine Buys, five Holds, and two Sell ratings. The average DLTR stock price target is $161.19, implying 8.1% upside potential.
The Takeaway: DLTR Stock is About the Future, Not the “Now”
By practically every indicator, DLTR stock rates as an overvalued investment. There’s not much the bulls can say about that other than it’s overvalued now. However, with incoming economic headwinds, Dollar Tree’s historical performance during troubled times makes it a worthwhile speculation.
