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BERKO: The Street expects Dollar Tree to grow

DEAR MR. BERKO: Last year I thought you were arrogant, cruel and insulting when you said that people on food stamps should only shop at Dollar Tree stores. My 37-year-old daughter and her husband have four children, use Dollar Tree, and save about $250 a week on packaged, canned and frozen food, household products, toiletries, and office, cleaning and craft supplies. Thank you. Now I’ve also become a weekly Dollar Tree shopper. Would you still by the stock? Do you think the FED will raise rates again? Do you think we are going into another recession? – SS, Oklahoma City.

DEAR SS: The Dollar Tree Store (DLTR-$75.42) is a veritable smorgasbord of bargains. And owners of two specialty restaurants I know shop at DLTR for various food products, paper goods and cleaning supplies. And nothing costs more than a dollar. DLTR, with 13,600 stores and $15 billion in revenues, recently purchased Family Dollar Stores, an $11 billion revenue company with 8,000 locations. After the dust settles, and after financial kickbacks, and after lawyers and the extortionate political plugola and boodle are paid by the investment bankers, DLTR should morph into a smooth, well-tuned growth stock. Earnings will be down in 2015 ($2.85 vs. $2.90) due to merger expenses plus costly rebannering of each Family Dollar Store. However, the Street expects earnings of $4.05 a share in 2016. As the integration process continues smoothly, management believes that synergies of $1.00 a share can be earned via outsourcing, better distribution, improved logistics and corporate SG&A controls.

So, “yes,” I think DLTR is an excellent long-term investment and in the next three to five years I believe the shares could trade at $120 if the board doesn’t split the stock as it has twice in the last five years. JP Morgan agrees and so does Cantor Fitzgerald, though Credit Suisse and Stifel Nicholas have downgraded DLTR to “underperform.” They believe that integrating the two companies will create unexpected problems that management is unprepared to handle. They also believe that years of DLTR’s impressive revenue and earnings growth will stall. If DLTR stalls, then Vanguard, State Street, Wells Fargo, American Century, BlackRock, Janus, Bank of New York, FMR and Lone Pine Capital, which together own over 70 million shares, will be mightily disappointed. Meanwhile, have your broker show you the prices on DLTR’s January 2017 call options. You’ll be impressed.

A growing number of wise professionals are seriously concerned about the ability of the consumer, who accounts for 70 percent of our GDP, to continue spending. The Federal Reserve Bank recently released some very scary numbers: Consumer borrowing reached an all-time high of $3.6 trillion (not including mortgage debt) in November of last year. In other words, our GDP is fueled by borrowed money from the consumer who earns less today than he earned in 2007, just before the recession. In 2008, 2009 and 2010, many consumers couldn’t pay their bills. Personal bankruptcies, for the first time, exceeded a million declarations in 2008. In 2009, bankruptcies rose to 1.4 million, and they reached a record filing of 1.5 million in 2010. It’s difficult to understand how consumers, whose incomes are lower today than eight years ago and who are above their collars in debt, have enough money to pay their growing obligations. But the credit card companies and banks are doing it again. Subprime loans are gaining popularity. Auto dealerships advertise, “We don’t turn anyone down!” Banks are making mortgages to “iffy borrowers.” And credit card companies, anxious for business, will issue plastic to my two Beaucerons, Abbott and Costello. So, there’s a 50/50 probability of a recession in 2017.

But there’s a silver lining here: If exports continue to decline; if retirement plans continue to underperform; if transfer payments continue to grow; if workforce participation continues to be low; if consumer incomes fail to rise; if better-paying jobs fail to materialize; if consumers continue absorbing record debt; if oil prices remain low and the Dow continues lower, then Janet Yellen may be reluctant to raise interest rates again. And I’m told that four of the seven members of the Board of Governors would oppose another rate hike.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.

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