We’re adding DLTR to our Best Idea Long list. This name’s got plenty of hair, and is not for everyone. But people who like making money might want to pay attention. The reality is that there are simply too many ways to win here, and few (if any) of them are being discounted in the stock after last week’s blow up. We’re sitting at the lowest cash flow multiple since the great recession, and the scenario I need to paint to get blown up long-side are both draconian and simply not realistic.
To be clear, this is not a capital preservation/low-blow-up-risk call. There’s real money to be made here over a TAIL duration. The Dollar Tree/Family Dollar merger is being thrown away in investors’ minds as having simply #failed. That’s where we disagree. Over the next 12-24 months, there are several catalysts and strategic call-options that we think will change the ‘deal #fail’ mindset – leading to a revaluation off a higher earnings base.
When all is said and done, we think these changes will put $8 in EPS power in play, and will actually prove that the company is better off today than as if this deal had never been done. Upside there is to $140 (17.5x $8), or 75% upside. If we’re wrong, and what was one of the best management teams (DLTR) becomes one of the worst and does nothing to effectively leverage the former FDO assets or break out of the buck price point in the core, then we’re locked into a $5.50-$6.50 earnings annuity. Give that a low teens multiple and we’re looking at a $68 stock on the low end. So we’re got $60 upside and $15 downside for a stable, steady business with little Amazon risk and predictable cash flows. I’ll take that any day.
We’re hosting a Black Book to review our thesis on Monday September 24th at 2pm. Details to come.