This Overlooked Stock Is Outperforming its Bigger and Better Competition

All the attention is on Family Dollar and Dollar General, but Dollar Tree is the sneaky long-term play that no one is talking about.

Jul 11, 2014 at 2:17PM

Amid news of the search by Dollar General (NYSE:DG) for a new CEO and Carl Icahn's push for a sale of Family Dollar (NYSE:FDO), Dollar Tree (NASDAQ:DLTR) ticked up 3.2% during this past week. This positive change in the midst of competitors' turmoil may represent a permanent trend, not a temporary anomaly.

A deeper look into Dollar Tree and its business proves the company is already outperforming its competitors on key metrics and boasts high potential for the future.

Looking for a cheap, long-term investment? Look no further.

A promising future
Dollar Tree's business strategy is the first thing that separates it from its competitors. All products at Dollar Tree cost $1, while products can cost as much as $5 at Family Dollar and Dollar General.

Morgan Stanley analyst Vincent Sinisi recently stressed how Dollar Tree's pricing strategy is a great advantage in the current macro-economic environment, as consumers are still regaining their purchasing confidence after the 2008 meltdown. Sinisi also believes any margin pressure will not affect Dollar Tree, due to its pricing strategy . Instead, this pressure will give Dollar Tree a distinct edge over competitors.

Another competitive advantage will come from future expansion. Dollar Tree already has a larger international reach than its competitors, and it has room to grow in domestic locations. Dollar Tree grew its store count by 30% in the past five years, and now has over 4,900 stores. The company is looking to open 7,000 new stores by the end of the decade. According to analysts, this expansion could double Dollar Tree's yearly earnings.  

On the other hand, analysts at Credit Suisse believe Dollar General's internal opportunities for growth are diminishing .

Currently, Dollar General operates twice as many stores as Dollar Tree, but in eight fewer states. It has expanded on a lesser scale than Dollar Tree, as Dollar General plans to open 700 stores by the end of the year . Family Dollar operates about 8.000 stores in four fewer states, but is closing nearly 400 stores by the end of the year .

Dollar Tree's future expansion rate and widespread reach show that it has the best potential for future sales.

One more upside for shareholders is Dollar Tree's consistent share repurchases. Dollar Tree's outstanding share count has decreased by almost 100 million since 2006. As a result, its EPS consistently grew. This repurchasing strategy shows that Dollar Tree's management values EPS growth, as with share repurchases EPS can grow even if net income doesn't. Consequently, Dollar Tree boasts the best price-earnings-growth (PEG) ratio among its competitors. This means that its future EPS growth is promising and the company may currently be undervalued as a result.


Dollar Tree makes money and benefits shareholders
On the surface, with its financial metrics Dollar Tree looks like a middling performer. Its free cash flow is considerably better than that of Family Dollar, but sits well behind that of Dollar General. In terms of revenue, Dollar Tree has earned less than its two main competitors for the past five years. On net income it does a bit better, as Dollar Tree sits behind Dollar General yet in front of Family Dollar. 

DLTR Net Income (TTM) Chart

DLTR Net Income (TTM) data by YCharts

Based on these statistics, Dollar Tree seems destined to play second fiddle between its two biggest competitors.

However, Dollar Tree claims the highest margins in the dollar store marketplace, where its competitors are struggling.

Dollar General recently revealed that it has struggled on margins because it has leaned on discounts and low-margin products . Family Dollar's well-known struggle with over-ordering inventory continues to put similar pressure on its own margins .

Dollar Tree's 35.49% gross profit margin, 1.3% higher than that of Family Dollar and nearly 4.6% higher than that of Dollar General, shows efficiency. Conversely, the gross profit margins of Family Dollar and Dollar General show steady declines since 2011, while Dollar Tree's gross profit margin was increasing.

DLTR Gross Profit Margin (TTM) Chart

DLTR Gross Profit Margin (TTM) data by YCharts

Operating margin statistics look much the same. Dollar Tree's operating margin sits at 12.36%, while Dollar General sits at 9.67% and Family Dollar is at 5.87%. Since 2011, Family Dollar's operating margin has steadily decreased and Dollar General's operating margin has stagnated. But Dollar Tree's operating margin consistently increased over the same time-frame.

DLTR Operating Margin (TTM) Chart

DLTR Operating Margin (TTM) data by YCharts

Dollar Tree's net profit margin provides encouragement for the company and its shareholders. On this metric Dollar General sits 1.77% under Dollar Tree, and Family Dollar sits a whole 3.73% under Dollar Tree. This performance shows that Dollar Tree's management effectively extracts profits from its business, while Dollar General and Family Dollar are finding it increasingly difficult to do the same.

DLTR Profit Margin (TTM) Chart

DLTR Profit Margin (TTM) data by YCharts

Foolish outlook
Want a long-term growth stock? Looking for a business that prioritizes profitability? Are you wondering what company is consistently shareholder friendly?

Take note of Dollar Tree. This company seems to be in the middle between its two dollar store competitors, but a deeper look shows promise for the future. Buy now and you should reap long-term benefits.

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Jared Billings has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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