Is the Family Dollar Store a Good Buy?
Brenda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The jury is out on FDO according to key analysts, with Deutsche Bank upgrading the retail stock from Hold to Buy, and Citgroup downgrading it from Buy to Neutral - all within the last several weeks. Why the controversy? First of all, harsh reality hit in early 2013 when an earnings "surprise" of 6% in the wrong direction caused the stock to plummet by 11.5% in the next trading session. Secondly, competition in the low end retail space is heating up not only between other Dollar store chains, but between other retail chains such as Big Lots and Tuesday Morning as well. Higher SG and A (sales, general and administrative) costs haven't helped the situation either, and low end retail stores have notoriously low margins.
So, why would this Foolish blogger see this stock, voted "Bear of the Day by Zacks on 3/21, as a good buy right now? For starters, it has been a solid performer in the portfolio I manage for my husband - gaining 40.51% since 2010. Not a 50 bagger, but not bad. Secondly, according to Deutsche Bank analyst Paul Trussell:
Our call is based on two key points, including: (1) our belief that the fear around FDO's future margin degradation (particularly on the GPM line) has peaked, and should be reflected is in the majority of Street forecasts at this point, and the worst should be in the rear view mirror post upcoming 2Q13 results in Mid-April; and (2) sales expectations, at times irrational during the previous twelve months - based on the potential of various initiatives, appear more “realistic” for the second half of this year (we are modeling SSS +4.3%).”
Read more: http://www.benzinga.com/analyst-ratings/analyst-color/13/03/3439670/update-deutsche-bank-upgrades-family-dollar-stores-to-bu#ixzz2OUkibaNa
Looking at the fundamentals for this stock, I see a respectable if not stellar dividend yield of 1.7%, 35.41% Return on Equity which is at the high end of the industry range, a beautiful Quick Ratio of 0.32 which means they are not heavily leveraged (or geared, as our UK friends would say), AND, last but not least......drum roll please.......$0.69 earnings per share which I think is great for a low end retail store.
Deutsche Bank estimates the stock price will rise from it's current position of $61.37 on Friday to $71. I agree - the Family Dollar Store makes good use of social media, accepts manufacturer's coupons to attract clientele, and locates stores away from main competitors wherever possible. I plan to hold it for at least the next year, while keeping a sharp eye on the margins to see if any further degradation occurs.
I own FDO as part of a portfolio I manage for my husband.