Cha-Ching? Morgan Stanley Calls Dollar Stores 'More Than A Recession Trade' In Upgrades

• Dollar General Corp. DG shares gained 17 percent since November 16, while shares of Dollar Tree, Inc. DLTR were up 21 percent.
• Morgan Stanley’s Vincent J Sinisi upgraded the ratings for both the companies, while maintained their price targets.
• The risk/reward for Dollar Stores could improve in view of the sector's resilience to any macro slowdown, Sinisi stated.

Dollar Stores could record acceleration in sales growth over the next year, particularly if the macro environment slows further.

“The recent debate has been whether a recession will occur; quite simply, we are not calling for a recession,” analyst Vincent Sinisi wrote. He added, however, that there was now a greater likelihood of low or negative macro growth, which is positive for Dollar Stores, and also that there was a lower probability of high macro growth.

“Our proprietary leading indicator supports the inverse relationship between Dollar Store comps and overall economic conditions, and an early read points to a potential upward comp inflection in 1Q16,” Sinisi mentioned. He added that in the bull case expectations were for acceleration in comp store sales to 5 percent, from 2-3 percent in the current Base Cases.

Dollar General

Sinisi upgraded the rating for the company from Equal-weight to Overweight, while maintaining the price target at $95. He said that Dollar General is a stable operator that has been generating consistent top-line growth, has margin expansion opportunities, and is focused on capital returns.

“Within the Dollar Stores, DG is our preferred play because we believe the stock can outperform in slow or no growth macro environments with its consistent operating performance,” the Morgan Stanley report noted.

Dollar Tree

The analyst upgraded the rating for the company from Underweight to Equal-weight, while maintaining the price target at $90. He commented that there continues to be some uncertainty surrounding the integration of Family Dollar Stores, Inc. FDO and around a turnaround.

“For DLTR, significant Bear Case downside remains given the still-early stages of the FDO integration, but overall risk/reward appears more balanced in the current macro backdrop,” Sinisi mentioned.