Family Dollar Stores Inc. Quarterly Valuation – July 2014 $FDO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Family Dollar Stores (FDO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Family Dollar Stores, Inc. (Family Dollar) operates a chain of more than 7,900 general merchandise retail discount stores in 46 states, providing consumers with a selection of merchandise in neighborhood stores. The Company’s merchandise assortment includes Consumables, Home Products, Apparel and Accessories, and Seasonal and Electronics. Its Family Dollar store is between 7,500 and 9,500 square feet, with an average of approximately 7,200 square feet of selling space. During the fiscal year ended August 25, 2013, the Company operated 7,916 stores. The Company offers a focused assortment of merchandise in a number of core categories, such as health and beauty aids, packaged food and refrigerated products, home cleaning supplies, house wares, stationery, seasonal goods, apparel, and home fashions. The Company’s typical store generally carries approximately 6500 – 7000 basic stock keeping units (SKUs). FDO Chart

FDO data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $65.70
MG Value $85.23
MG Opinion Fairly Valued
Value Based on 3% Growth $47.34
Value Based on 0% Growth $27.75
Market Implied Growth Rate 5.81%
Net Current Asset Value (NCAV) -$2.32
PEmg 20.12
Current Ratio 1.54
PB Ratio 4.65

Balance Sheet – 3/31/2014

Current Assets $2,131,800,000
Current Liabilities $1,381,900,000
Total Debt $484,200,000
Total Assets $4,002,800,000
Intangible Assets $0
Total Liabilities $2,395,400,000
Outstanding Shares 113,820,000

Earnings Per Share

2014 (estimate) $2.81
2013 $3.83
2012 $3.58
2011 $3.12
2010 $2.62
2009 $2.07
2008 $1.66
2007 $1.62
2006 $1.26
2005 $1.30
2004 $1.53

Earnings Per Share – ModernGraham

2014 (estimate) $3.26
2013 $3.34
2012 $2.94
2011 $2.48
2010 $2.06
2009 $1.71


Dividend History
FDO Dividend Chart

FDO Dividend data by YCharts

Conclusion:

Family Dollar qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio and the high PEmg and PB ratios, but the company passes all of the Enterprising Investor’s requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities such as through a review of ModernGraham’s valuation of Dollar General (DG). As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $3.26 in 2014. This level of demonstrated growth supports the market’s implied estimate of 5.81% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out the previous ModernGraham valuations of Family Dollar Stores (FDO) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Family Dollar Stores (FDO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Family Dollar Stores (FDO) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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