Does Fred’s, Inc. (FRED) Have What it Takes?

Current Share Price

Fred’s, Inc. (NASDAQ:FRED) is currently trading at $13.34, which is 16.5% below its 52 week high of $15.98. At current earnings of $0.89 per share, Fred’s is trading at a 14.98 multiple. They have a very respectable market cap of $490 million. Their current beta is 0.9, meaning they are less volatile than the overall market.

2013 & 2014 Projections

In 2013, Fred’s is projected to earn $1.01 per share, a 13.5% increase from 2012. This is not as large of a growth as I would like to see from a company with a market cap under $500 million, but looking two years out makes the valuation worth it.

In 2014, analysts expect Fred’s to earn $1.16 per share. This would be a 14.8% increase from 2013 and 30.3% from 2012. If Fred’s were to continue trading at a multiple of 15, this would put them around $17.50 per share. This represents a 32% move from its current level. I will take a 32% gain in two years any day of the week. Below is a chart of this expected earnings growth.

Expectations

2013 has the potential to be a solid year for Fred’s. I believe they can return to the $15 range by the end of the year, and with the growth in earnings and the continued dividend increases, I think Fred’s can easily run up to $18 per share. This would be an incredible 35% move in two years, but Fred’s is strong enough to pull it off. I am initiating an outperform call on CAPS. Fred’s Super Dollar is a long term BUY.

The article Does Fred Have What it Takes? originally appeared on Fool.com and is written by Joseph Solitro.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.