At current valuations, DLTR looks undervalued, as it is priced to fade from cycle-high profitability to near cycle-lows, but fundamental tailwinds and management sentiment signal otherwise

• Markets expect DLTR to see Adjusted ROA fade from current high 12% levels to near cycle-low levels of 8% over the next five years, levels only seen twice in the past 15 years

• Management is confident about gross margin and SG&A improvements, their assortment, and the consolidation of services shared with Family Dollar, which should help them maintain current margins and turns to beat market expectations

• DLTR currently trades at a 2.1x Adjusted P/B metric, which is in line with its peer group, but with far stronger growth prospects, further signaling the potential for multiple expansion with limited equity downside

• DLTR’s returns are materially distorted by how as-reported GAAP accounting treats operating leases as an expense as opposed to an investment, and by how GAAP accounting understates earnings around acquisitions

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Submitted April 04, 2017 at 01:00AM by Valens_Research http://ift.tt/2ow9CHB