JP Morgan: Buy Dollar Tree because lower-income earners to get boost from tax cut, wage hikes

  • J.P. Morgan reiterates its overweight rating for Dollar Tree shares, saying low-to-middle income households will receive significant monetary benefits this year.
  • "Importantly our recent fieldwork and satellite data points to top-line acceleration as the quarter progressed (Jan > Dec > Nov) and potential for additional upside to our Dollar Tree banner assumption," the firm's analyst writes.
A Dollar Tree store in Miami
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A Dollar Tree store in Miami

Dollar Tree's stock will thrive as tax reform and wage increases help the retailer's customers, according to J.P. Morgan.

The firm reiterated its overweight rating for Dollar Tree shares, say low-to-middle income households will receive significant monetary benefits this year.

"Our analysis points to a ~$500 after-tax net wallet tailwind at the $40,000 household income demographic in 2018 with the benefit from incremental minimum wage increases (+1.8% YOY = $680) and $380 individual tax reform benefit more than offsetting the negative impact of higher gas prices … and rising healthcare and housing expenses," analyst Matthew Boss wrote in a note to clients Thursday entitled "The Low-to-Middle Income Wallet Math; Favorable Backdrop w/ 2018 & 2019 Tailwinds > Headwinds."

Boss increased his price target to $133 from $120 for the retailer's shares, representing 26 percent upside from Wednesday's close.

The analyst noted how the minimum wage increased by an average of 3.8 percent in 23 states last year and is expected to rise again in 22 states this year. He said the tax reform bill will provide an annual benefit of $930 on average for the $49,000 to $86,000 income bracket, citing a Tax Policy Center estimate.

"Importantly our recent fieldwork and satellite data points to top-line acceleration as the quarter progressed (Jan > Dec > Nov) and potential for additional upside to our Dollar Tree banner assumption," he wrote.

Dollar Tree shares rose 1.2 percent Thursday after the report.