Dollar Tree (DLTR) is one of the most followed stocks by Zacks.com visitors lately, so it might be a good idea to check out some of the factors that could affect the stock’s near-term performance.

Shares of this discount retailer have returned -4.6% over the past month versus a change of +0.3% for the Zacks S&P 500 Composite. The Zacks Discount Retailers industry, which includes Dollar Tree, has gained 3.5% during this time. The key question now is: where could the stock go in the near future?

Although media reports or rumors about a significant change in a company’s business prospects usually trigger a trend in the stock and result in an immediate price change, there are always certain fundamental factors that ultimately determine the buy and hold decision.

Revisions to earnings estimates

Here at Zacks, we prioritize evaluating a company’s change in future earnings forecast above all else. That’s because we believe the present value of its future earnings stream determines the fair value of its stock.

Our analysis is basically based on how sell-side analysts who cover the stock adjust their earnings estimates to take into account the latest business trends. When earnings estimates for a company increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, leading to an increase in its price. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

Dollar Tree is expected to report earnings of $1.05 per share for the current quarter, which would represent a change of +15.4% from the prior year. Over the past 30 days, the Zacks Consensus Estimate has changed -1%.

For the current fiscal year, the consensus earnings estimate of $6.58 suggests a change of +11.7% from the previous year. Over the past 30 days, this estimate has changed by -0.7%.

For the next fiscal year, the consensus estimate of $7.75 represents a change of +17.8% from Dollar Tree’s expected earnings a year ago. Over the last month, the estimate has changed by -0.6%.

With an impressive outside-audited track record, our proprietary stock rating tool – the Zacks Rank – is a more conclusive indicator of a stock’s near-term price movement because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, have resulted in a Zacks Rank #4 (Sell) for Dollar Tree.

The story continues

The following chart shows the development of the company’s consensus estimate for earnings per share over the next 12 months:

12 months EPS

Sales growth forecast

While earnings growth is arguably the best indicator of a company’s financial health, nothing will happen if a company can’t grow its revenue. After all, it’s nearly impossible for a company to grow its profits over a sustained period of time without increasing its revenue, so it’s important to know a company’s potential revenue growth.

For Dollar Tree, the consensus revenue estimate for the current quarter of $7.51 billion represents a change of +2.6% from last year. For the current and next fiscal years, estimates of $31.23 billion and $32.91 billion suggest changes of +2.1% and +5.4%, respectively.

Latest reported results and surprise history

Dollar Tree reported revenue of $7.63 billion in the last quarter, a change of +4.1% year over year. Earnings per share for the same period are $1.43, compared to $1.47 last year.

Compared to the Zacks Consensus Estimate of $7.63 billion, the reported earnings represented a surprise of -0.1%. The EPS surprise was 0%.

Over the last four quarters, the company has only beaten earnings per share estimates once. The company has only beaten revenue estimates once during that time period.

Evaluation

No investment decision can be efficient without considering the valuation of a stock. To predict the future price movement of a stock, it is crucial to determine whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.

Comparing a company’s current valuation multiples, such as the price-to-earnings ratio (P/E), the price-to-sales ratio (P/S) and the price-to-cash-flow ratio (P/CF), with its own historical values ​​helps determine whether the stock is fairly valued, overvalued or undervalued. Comparing the company to comparable companies using these parameters also gives a good sense of the appropriateness of the share price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional value metrics) ranks stocks into five groups from A to F (A is better than B; B is better than C; and so on), making it helpful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.

Dollar Tree gets an A grade on this score, meaning it trades cheaper compared to its competitors. Click here to see the values ​​of some of the valuation metrics that led to this rating.

Diploma

The facts discussed here and much more information on Zacks.com could help you decide whether the market hype surrounding Dollar Tree is worth paying attention to. However, its Zacks Rank #4 suggests it may underperform the broader market in the near future.

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