Often mentioned here in the past, Dollar Tree looks good to me at $38.

Not screamingly cheap at about 14 times current run-rate earnings, and
not a big fall from its high last June around $57, but I like 'em.
With essentially no debt and steadily rising earnings I think EPS will grow for quite a while.
They've bought back about 4.4% of their shares each year on average in the last 9 years.
All of book/share, cashflow/share, sales/share have risen 16%-17%/year in the last decade.
Net return on assets in the 20-30% range in the last few years.
With luck it's a great business (and simple too!) at a fair price rather than a fair business at a great price.
Target price >=double in <=5 years which means >=15%/year for that period.

Might get cheaper. If so I'll add more.
I did a synthetic long, very rare for me to get that fancy.
(write a put and buy an ITM call: essentially all the risk and reward
but little or no cash up front, though that's not really why I did it)

Jim

I've been following this one since you
first mentioned it. I like the business
itself especially since anyone can
understand it and since they seem to do
well during recessions.

Here's my back of the envelope (which
may be too conservative):

- Current cyclically-adjusted EPS: $1.80 to
$1.85 (thus, I feel current EPS are above
trend).
- 8-Year forward EPS growth rate: 14%
(They've done 16%/yr the last ten.
Consensus has 17.3% EPS growth next five
year and VL has 18.5%..but analysts
always seem too optimistic.)
- Results in end 2020 EPS of $5.21.
- Apply conservative multiple of 14.6x
(historical P/E is more like 17...but
I believe we're still in a period of
P/E compression that may or may not
last until 2020.)
- Gives a target range of $75 to $80
and an annual return of 8% to 9.5%.
This should out-perform the S & P
nicely over this time-frame. However,
I think there might be better risk/
rewards out there currently.

- A target buy range of $25 to $32
would yield a very attractive 12% to
15% annual return under the above
scenario and provide an increased
margin of safety.

Whaddya think Jim?

Thanks,
John

I would like to know what you think of the rising wages in China in relation to this business and whether, in your opinion, this could be a cause for the dollar stores (and, indeed, to some extent WMT) to command lower valuations today.

(I myself am long a few long dated calls on DLTR but am beginning to think a bit more about this.)

I would like to know what you think of the rising wages in China in
relation to this business and whether, in your opinion, this could be a
cause for the dollar stores (and, indeed, to some extent WMT) to command lower valuations today.

I don't see any meaningful risk in higher wages, as there will always be lots
of things that are reasonably cheap and suitable for dollar store inventory.
If all the world's cheapest things get more expensive, there will still
be something that is the cheapest, and that's what they'll sell.

To me the bigger risk is that these firms are basically importers: all
revenue is in USD and the great majority of COGS is in other currencies.
Those other currencies might be pegged to the dollar, but not forever.
A fall in the US dollar is a big risk for them. Same for Walmart.
Admittedly this won't be great for the purchasing power of anybody in the
US so a mitigating factor is that even more people will be forced
to shop at Walmart and dollar stores.

If one is worried about the risk of a crash in the dollar, better
to own Caterpillar than Walmart.

Jim

I don't see any meaningful risk in higher wages, as there will always be lots
of things that are reasonably cheap and suitable for dollar store inventory.
If all the world's cheapest things get more expensive, there will still
be something that is the cheapest, and that's what they'll sell.

To me the bigger risk is that these firms are basically importers: all
revenue is in USD and the great majority of COGS is in other currencies.
Those other currencies might be pegged to the dollar, but not forever.
A fall in the US dollar is a big risk for them. Same for Walmart.
Admittedly this won't be great for the purchasing power of anybody in the
US so a mitigating factor is that even more people will be forced
to shop at Walmart and dollar stores.

If one is worried about the risk of a crash in the dollar, better
to own Caterpillar than Walmart.


Thanks for the analysis! With regard to the USD, I think the challenge
will only come about if the US will get competitive in producing the
cheap goods and that seems unlikely to me though modern, automated
manufacturing might still prove me wrong.