Fred's Could Be 50% Undervalued Compared to Peers

Sometimes, all the reasons others are shunning a company are the same reasons to initiate a position in it.

Take Fred’s, Inc. (NASDAQ:FRED), for instance, a deep-discount retailer with 600 stores in 15 southeastern states. Investors have punished the stock, sending it to levels that value it less than half of its competitors.

Its differentiator is serving low-income customers in rural and inner-city neighborhoods, far from Target (TGT) and Wal-Mart (WMT) stores. Many customers prefer the ease of access to Fred’s stores, as opposed to having to drive to the nearest big box retailer.

With annual sales of $1.8 billion, its merchandise and business model is similar to that of its two biggest competitors: Dollar Tree (NASDAQ:DLTR) and Family Dollar Stores, Inc. (NYSE:FDO).

But that’s where the similarities end. In the past year, Fred’s shares have fallen nearly 15% while its competitors have each risen over 20%. The reason? The company was just plodding along, languishing under an anemic, lethargic management.

Back in February, Fred’s Board of Directors decided to make a change, and it brought in a new CEO, who’s been generating quite a lot of buzz since his arrival.

Bruce Efrid – an industry veteran – hasn’t wasted any time: he’s closed stores that were underperforming, gave the remaining ones a new look and feel, and remade company inventory procedures.

Efrid was just what the doctor ordered: Fred’s has strongly outperformed its peers since his appointment. Even so, the stock still looks like a relative bargain. Shares trade at 1.4 times book value, while Dollar Tree and Family Dollar Stores are both twice that, suggesting Fred’s shares are undervalued by 50% compared to its peers.

Fred’s has very little debt and a nice cash pile of $46 million. Efrid’s confident his changes can increase top line sales by 10%. He also is gunning for a corresponding increase in margins from their current 1.8% to 3%.

If he’s successful, Fred’s shares could easily pop by 50-75% in the coming months, handing investors who take a position now a nice Christmas present.

Disclosure: None.

Comments

[mdpath:]

So why dont't you have a position in the stock.

Aug 12 08:37 AM

[captainccs:]

FRED could be 50% OVER valued with a P/E of 29 vs. 15 for FDO and 17 for DLTR

Aug 12 09:31 AM

[brombonz:]

Fred's real peers are the Alco stores of DUCK and the Pamida stores once owned by Shopko, as well as Wal*Mart and perhaps the "dollar" stores you mention.

Aug 12 09:43 AM