Brian Bolan

Bear of the Day: Family Dollar (FDO)

by Brian Bolan

March 21, 2013 |
FDO

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Family Dollar (FDO - Analyst Report) reported a negative earnings surprise at the start of the year and didn't capitalize on the Wal-Mart memo leak snafu. The stock is a Zacks Rank #4 (Sell) and is the Bear of the Day.

Wal-Mart

A mid-February email was leaked from one of the nation’s largest retailers. In the email the Wal-Mart exec noted that people were not spending at the mega store and that the company was trending the worst February in years. The thought at that time was that customers were feeling the pinch of higher taxes and higher gasoline prices. Those two headwinds for WMT could have been a big tailwind for FDO as consumers were thought to "trade down" to a lower level retailer.

Company Description

Family Dollar Stores, Inc. operates a chain of self-service retail discount stores primarily for low- and middle-income consumers. It operates a chain of approximately 7,400 general merchandise retail discount stores in 45 states. The company was founded in 1959 and is based in Matthews, North Carolina.

FDO Negative Earnings Surprise

One look at a price chart of FDO and you can see a big drop at the start of 2013. The company posted a negative earnings surprise of 6%. That miss sent the stock lower by more than 11.5% in the session following the release.

Competition is intense in the dollar store segment, with Dollar Tree (DLTR) competing directly with FDO. Another competitors would be Five Below (FIVE) which offers products for $5 or less. Both DLTR and FIVE are Zacks Rank #3 (Hold) stocks.

LTM Sees Estimates Moving Lower

Estimates for FDO have been declining of late. The Zacks Consensus Estimate for 2013 for LTM stood at $4.25 as of October 2012. The consensus now stands at $3.98. Similarly, estimates for 2014 have moved from $4.95 in September 2012 to their current level of $4.46.

Valuation

Following the big drop in share price, the valuation for FDO has become more reasonable. The trailing twelve months PE multiple of 16x is less than the industry average of 22x. The forward earnings multiple of 15x is nearly at an equal discount to the 20x industry average. Price to book of 5x is well above the 3.6x industry average while the price to sales multiple of 0.7x is slightly below the 1x industry average.

The Chart

The 3 month chart below shows the stock doing the Wall Street equivalent of "being discounted." A recent recovery since February lows has this stock trending higher with earnings right around the corner. The last three earnings reports have seen two meets and one miss. At present, there might be better alternatives in the lower end of the retail space.

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio

Brian is also the editor of Follow The Money Trader a trading service that tracks institutional money flows and looks for great stock picks from that data.

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