Family Dollar Stores, Inc. (NYSE:FDO) is up today as the company reported earnings numbers that were narrowly up from the same quarter in 2011, even though it took one-off charges related to settling litigation. EPS were 69 cents per share compared to 66 cents in the fourth fiscal quarter of last year (Family Dollar’s fiscal year ends in August). Revenue numbers were also up, partly because the company opened more locations.
Dollar stores have been a popular investment for some time now, due to investor concerns about low consumer spending (the stock’s beta is only 0.5, suggesting a weak correlation between its performance and the market’s). In the last year Family Dollar’s stock is up 37%, and it is up 150% over the last five years. This rise, which has been stronger than the improvements to the company’s actual business so far, has left it with moderately high multiples for the discount retail industry. Family Dollar Stores, Inc. trades at 19 times trailing earnings, and with Wall Street analysts projecting $4.22 in earnings per share for this fiscal year the current-year P/E is 16. There is a modest dividend yield- 1.3%- but for the most part an investor in the company has to be expecting its growth to continue, and to continue for some time at similar rates to what it has recently been experiencing.
Family Dollar Stores, Inc. is one of several hedge funds’ favorite stocks. It was Trian Partners’ largest holding at the end of June, as the fund owned 10 million shares (find more top stocks from Trian Partners). Trian is run by billionaire activist investor Nelson Peltz. Lee Ainslie’s Maverick Capital joined the hedge fund bandwagon into dollar stores during the second quarter, initiating a position of 3.3 million shares in Family Dollar (see more stock picks from Maverick Capital). Alan Fournier’s Pennant Capital Management but its stake by 8% but the 2.7 million shares remaining in the fund’s portfolio kept it as one of Pennant’s ten largest positions (research more of Pennant’s favorite stocks).
The most obvious peers for Family Dollar are its direct competitors, the larger Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR). These companies have been growing as well: in its most recent quarter the $17 billion market cap Dollar General saw its revenue rise by 10% and its earnings increase by 47% compared to the same period in the previous year, while Dollar Tree (whose market cap is $11 billion) grew its earnings by 26%. Interestingly, despite experiencing more growth on a historical basis and being the market leader in the “dollar” segment, Dollar General does not trade at a discount to the other two companies. Its trailing P/E is 20, square in the middle of the 19-21 range formed by Family Dollar and Dollar Tree. This suggests that the market does not expect its superior growth to continue- but the sell-side does, placing its forward P/E of 15 a bit below what its smaller peers are trading at. We wouldn’t base an entire investment thesis on that point, but it does seem to be narrowly cheaper, and Dollar Tree narrowly more expensive, than Family Dollar when taking growth into account.
Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) also make for good peers. There’s considerably less growth here, owing to these companies’ massive current size (even Target’s market cap is five times that of Family Dollar). However, these companies trade at a substantial discount to the dollar stores despite what we would call a superior brand. Wal-Mart trades at 16 times forward earnings and 14 times forward earnings estimates; Target’s own trailing and forward P/E multiples are 14 and 13, respectively. Dividend yields above 2% are a very small plus compared to Family Dollar, and overall we think that potential investors who are excited by the company’s recent report would be advised to look to the big-box stores for value or the superior growth of Dollar General if the dollar store concept is too appealing to ignore.
