Fred's Valuation Reasonable

Fred's, Inc. (FRED - Analyst Report) operates 658 discount general merchandise stores, mainly in the southeastern United States. Fred's stores carry more merchandise including household goods, apparel/linens, food/tobacco, paper and cleaning, health/beauty, and pharmaceuticals. The company's stores primarily serve lower- to middle-class and fixed income families located in small- to medium-sized towns.

The company reported third quarter earnings of $0.15 per share, which matched our estimate. For the fourth quarter, the company expects comparable-store sales to be flat with the strong consumables sales offset by weaker sales in discretionary departments.

Fred's Inc.'s strategic plan is producing solid results. The company's sales and operational initiatives are driving store traffic and controlling expenses. Its strategic plan has led to greater expense leverage, higher inventory turnover, and improved cash flow.

That said, FRED shares are trading at a reasonable valuation of 13.4x our 2009 EPS estimate. We rate the stock a Hold. Our target price is $11.50, or 14x our fiscal 2009 EPS estimate.

Read the full analyst report on FRED