Analyst: Pick Dollar Tree Over Family Dollar

by Alyssa Oursler | August 26, 2013 1:15 pm

If you’re feeling bullish on discounters, you’re better off betting on Dollar Tree (DLTR[1]) than Family Dollar (FDO[2]).

At least, that’s what an analyst at Deutsche Bank is telegraphing.

Sure, discount retailers — including names like TJX Companies (TJX[3]) and Ross Stores (ROST[4]) — might seem to be the winners in the face of weak consumer spending[5]. However, Deutsche Bank actually downgraded Family Dollar from “buy” to “hold” this morning, saying that operational improvements through 2014 are already built into the earnings forecast, and thus the stock price.

The firm did raise its price target on Family Dollar … but probably just because the stock already passed its last one. DB originally targeted $70, but FDO is currently trading close to $73. In a move than can hardly be called optimistic, the old target was raised to $74 — good for less than 2% upside.

Analyst Paul Trussell also thinks Family Dollar faces tougher same-store sales comparisons over the next two quarters, compared to competitors like Dollar General (DG[6]) and Dollar Tree.

Which brings us to the laundry list of reasons Trussell likes DLTR. For one, Trussell says accelerated traffic vs. easier comparisons should breed consistent 3% to 4% gains in same-store sales in the second half of the year. On top of that, he likes:

As a result, Deutsche Bank now rates Dollar Tree as a “buy” and raised its price target from $49 to $60 — the same target that analysts at RBC Capital and Wedbush also upgraded DLTR to, and representing 10% upside.

And it’s true: Dollar Tree looks like a decent deal, even in the face of the stock’s 34% year-to-date run-up, which is double that of the S&P 500.

DLTR is trading for 17 times projected 2014 earnings. While that’s higher than rival DG — which has climbed 27% year-to-date and is going for 15 times forward earnings — it’s also justified by its growth prospects. Dollar Tree is slated for 18% annualized earnings growth over the next five years, or 3 percentage points better than Dollar General.

Meanwhile, Family Dollar, which is roughly matching the market, looks overpriced. FDO is trading for a higher premium than DLTR — 18 times forward earnings — yet is only slated for earnings growth of 11% per year over the next half-decade.

The bottom line: If you want to bet on discounters, go for it. But know that all names in the space aren’t looking equal right now.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities. Follow her on Twitter at @alyssaoursler[7].

  1. DLTR:
  2. FDO:
  3. TJX:
  4. ROST:
  5. winners in the face of weak consumer spending:
  6. DG:
  7. @alyssaoursler:

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