Dollar Tree Stock Up 7% Today– Time to Buy DLTR Stock?

The price of Dollar Tree stock has dropped nearly 5% so far in September following the pronounced 12% single-day downtick that the issue experienced back in late August after the company released its financial results covering the second quarter of 2021.

Back then, the company announced that it was trimming its earnings forecast for the full 2021 fiscal year amid ongoing supply chain disruptions that would translate into lower top-line margins and higher operating expenditures.

Earnings per share for the full year are now expected to land at around $5.4 and $5.6 per share compared to a previous forecast of $5.8 and $6.05 per share.

However, shares are rising more than 7% this morning after the Board of Directors approved an increase in the amount authorized for share repurchases to $2.5 billion, up from a previous figure of $1.45 billion approved in March this year.

So far this year, the company has only allocated $950 million of this total but market participants seem to be expecting that more money will be deployed soon following the stock’s sharp post-earnings downtick.

Can this announcement result in a full-blown trend reversal for Dollar Tree stock? In the following article, I’ll take a closer look at the price action and fundamentals of DLTR to possibly answer that question.

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Dollar Tree Stock – Technical Analysis

Today’s pre-market uptick is coinciding with the formation of a double-bottom in DLTR stock at the $84 level with the stock bouncing off this threshold during the 24 and 27 September sessions.

Volumes ticked higher on the day that the price bounced off this support area but remained below the 10-day average. However, news about this upsized share repurchase program may end up confirming this pattern and that may result in some sizable short-term upside for DLTR stock.

Moreover, momentum oscillators such as the Relative Strength Index (RSI) are emerging off the depths upon plunging to oversold levels briefly while negative histograms readings in the MACD have been steadily decreasing.

Based on yesterday’s closing price of $86.3 per share, the company would have to buy at least 18 million shares to fully deploy the remaining $1.55 billion of its authorized repurchases.

Daily volumes are currently standing at around 3.5 million shares per day which means that any large-size purchases will probably prompt some interesting single-day upticks for DLTR stock.

Moving forward, from a technical standpoint, the outlook for Dollar Tree stock is bullish amid a confirmed double-bottom formation that coincides with this positive development.

Dollar Tree Stock – Fundamental Analysis

Sales of Dollar Tree have been steadily rising in the past five years, moving from $20.72 billion to $25.5 billion at a compounded annual growth rate (CAGR) of 5.3%. For a company of its size, this relatively slow growth rate is somehow decent while inflationary pressures may accelerate the uptrend for DLTR’s top-line as budget-strapped consumers could flock to its stores to stock up on essential goods.

That said, the firm’s gross margins have been declining during that same period to an average of 30% while GAAP operating margins have stood at around 7% and 9% in the past few years.

Meanwhile, during the same 5-year period, normalized diluted earnings per share for Dollar Tree have grown from $3.53 to $5.35 result in an 11% CAGR and the company seems to have been using its free cash flows to pay down a portion of its debt as long-term commitments have dropped from $6.17 billion back in 2016 to $3.22 billion by the end of the last quarter.

At its current price of $86.3 per share, the stock is trading at around 18 times its free cash flows for the last twelve months and at 15 times the upper bound of its EPS guidance for the 2021 fiscal year.

If inflationary pressures in the United States, Dollar Tree may benefit from higher demand for its discounted products. Meanwhile, even though these supply chain disruptions may depress the firm’s bottom-line profitability temporarily, the company should be able to ramp up its EPS once again once these issues have been resolved and the inflation tailwind may play a more important role in the narrative when that happens.

Considering these factors along with the bullish technical setup outlined above, the outlook for Dollar Tree is bullish but investors may need to be a bit patient for these tailwinds to fully unravel.

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