J.P. Morgan Goes Overweight Dollar Tree: Here's Why

• Shares of Dollar Tree, Inc. DLTR are down 14 percent in the last three months, after trading at a high of $78 on August 6.
• JP Morgan’s Matthew R. Boss re-initiated coverage of the company with an Overweight rating and a price target of $90.
• The integration of Family Dollar Stores, Inc. FDO is firmly under the control of Dollar Tree’s management, but will take time to deliver the expected synergies, Boss mentioned.

Analyst Mathew R Boss mentioned that Dollar Tree’s fundamentals are unlikely to change overnight, since the synergies from the deal with Family Dollar will take time to be realized.

Boss expects margins at Family Dollar to contract to 2.5 percent in 2016, from 3.5 percent at present, before expanding to nearly 4 percent by 2018, given reduced vendor funding during SKU rationalization and upfront store labor investments.

“Importantly, the integration appears firmly under mgmt’s control with CEO Sasser likening FDO progress to-date to a "250+ yard drive squarely in the center of the fairway,” Boss wrote.

Dollar Tree’s CEO Sasser referred to the 3-year synergy target of $300M as “a base case scenario (expressing disappointment if not exceeded) equating to ~250-300bps of consolidated EBIT margin (primarily FDO),” the JP Morgan report mentioned.

Dollar Tree’s shares have lost about 20 percent since July, versus the SPX remaining flattish, and the company’s risk/reward appears “compelling.” Boss said.