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Family Dollar Stock Rates a Strong Buy

Growing the business by expanding products is a solid strategy

   

family dollar 150x150 Family Dollar Stock Rates a Strong BuyDiscount retailer Family Dollar Stores (NYSE:FDO) releases its next batch of quarterly operating results this morning before the opening bell. With a new CFO at the helm and a series of new partnerships, is this a good bargain to pick up in the wake of earnings, or is this just another dime a dozen stock? Let’s find out.

Company Overview

With over 7,000 stores across 45 states in the U.S., Family Dollar is one of the largest discount variety stores in the nation. Contrary to its name, Family Dollar actually isn’t a true-blue dollar store, but most of its products cost less than $10. With each store modeled to look like a typical supermarket, shoppers can buy everything from food to clothing to assorted household products. Family Dollar employs 45,000 nationwide and brought in $8.5 billion in sales last year.

Competition Buzz

Nowadays, discount stores are seemingly everywhere, so Family Dollar has plenty of competition to contend with, including Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR) and Wal-Mart (NYSE:WMT). And in the case of these companies, don’t let the low price tags fool you — each of these discount retailers is enjoying robust financial growth.

Of the four retailers, Dollar General has the strongest fundamentals, followed by Dollar Tree, Family Dollar then Wal-Mart. Now what’s interesting is that each of these companies could stand to improve their cash flow as well as their track record of beating earnings estimates. Each of these companies receives an A rating overall due to their solid fundamentals and strong buying pressure.

Expansion Strategy

In the past quarter Family Dollar has kept busy. In Mid-April, the company appointed former Giant Eagle president Mary Winston to be Family Dollar’s new executive vice president and chief financial officer. In early May, the company entered a strategic partnership with grocery and foodservice supplier McLane. Through this partnership, McLane will now stock 7,200 Family Dollar stores with a variety of refrigerated and frozen food.

Then just a few weeks later, Family Dollar signed a multi-year agreement with Coinstar (NASDAQ:CSTR) to begin installing Redbox video and videogame rental kiosks at its retail locations. These efforts are on top of an earlier agreement with PepsiCo (NYSE:PEP) to sell Pepsi beverages. All of these initiatives are expected to drive top-line growth because customers will be drawn to the greater selection of merchandise. This quarter, analysts expect the company to grow sales by 10% and earnings by 18%.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 12 months, this stock has held steady in buy territory. That’s because Family Dollar does well in terms of its earnings growth, earnings momentum, analyst earnings revisions and return on equity.

At the same time, there is still plenty of room for improvement in terms of sales growth, operating margin growth, earnings surprises and cash flow. What really keeps FDO at a strong buy is its top-of-the-line buying pressure. FDO receives a B for its Fundamental Grade and an A for its Quantitative Grade.

Bottom Line: As of this posting, June 27, I consider FDO a A-rated Buy.

Recommendation:A-rated Buy

Sound Off: What do you think about FDO? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/family-dollar-stock-rates-a-strong-buy-fdo-dg-dltr-emt-pep-cstr/.

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