Earnings Preview For Family Dollar Stores
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Family Dollar Stores (NYSE: FDO)
Background: Family Dollar Stores, Inc. is one of the fastest growing discount store chains in the United States. The merchandising concept responsible for this growth provides consumers with good values in low cost, basic merchandise for family and home needs. The merchandise is sold at everyday low prices in a no frills, low overhead, self-service environment. Most merchandise is priced under $10.00. Stores generally range in size from 6,000 to 8,000 square feet and most are operated under leases. The company was founded in 1959 and is headquartered in Matthews, North Carolina. Family Dollar Stores, Inc. trades an average of 1.4 million shares per day with a market cap of $7.65 billion.
52-Week Range: $49.17 to $74.73
Book Value per Share: $11.23
Price To Book: 5.62
Fourth quarter earnings are highly anticipated by hopeful investors expecting a big earnings growth report before the market opens on October 3, 2012. The Analyst's mean appraisal is presently 75 cents a share, a gain of 9 cents (12%) from 66 cents during the corresponding quarter last year. The average analyst target price for FDO is $69.73.
Family Dollar along with other "dollar" type stores continue to be a thorn in the side of Wal-Mart (NYSE: WMT). The smaller footprint and higher social acceptance allows Family Dollar greater exposure to their customer base. The margins are not as attractive with Family Dollar as Wal-Mart, which I believe is a function of the limited high margin products sold.
I'm a fan of Wal-Mart because of the world-wide presence offered, however, with no end in sight with the economic downturn, Family Dollar is positioned to excel in the retail environment.
After testing the 200 day moving average for support for the last month, Family Dollar will need to beat by at least a penny a share to stay bullish. While the analysts are calling for 75 cents, traders are expecting a beat above estimates. Investors should expect another test of the key moving average.
The last date FDO released earnings was June 28, 2012, and the closing price was $67.20. Based on a recent price of $65.35, shares are down 2.8%. What this means to you is that if Family Dollar comes in at the estimate, you may see a sell off.
Sell-offs after coming in on target are confusing to many investors because it appears that the company met the target, but it's a moving target to be sure.
This stock currently has an annualized dividend of 84 cents, yielding 1.33%. Examining the history of a company is a great way to help understand what to expect moving forward. The dividend has grown from the last three year average of $0.68 per share. Over the last five years, the dividend has grown by an average of 12.1% per year.
Currently, the short interest based on the float is small and not a big concern. Short interest is 4%.
How can play and or protect our portfolio through the earnings report?
One effective strategy I use for short term market fluctuations in longer term investments is selling covered calls against some or all of my holdings. The premium is relatively low, especially moving into earnings, but October $70 strike calls sell for about 50 cents ($50 per contract). This is a reasonable contract to sell due to the lower implied volatility (time premium) the contracts offer, allowing for over a 5% capital gain and lowers risk by almost 1%. Selling covered calls will allow you to get paid to wait for the next dividend payment.
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