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, PDL Capital (298 clicks)
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For anyone who believes opportunity is limited in our great country, they need only look at the sector encompassing stores that sell goods for a dollar. There are thousands of stores making up the sector, with a public market cap alone of over $20 billion. And in these tough economic times, these stores have done extremely well. How well? Well enough that I want to add one to my portfolio. So I decided to host a smackdown. They’ve also become bona fide competitors to big grocery stores. I remember the days when these dollar stores carried inferior generic garbage. Now they carry brand name items, making them dangerous to the grocer. The four largest companies are Dollar Tree (NASDAQ:DLTR), Ninety-Nine Cent Stores (NYSE:NDN), Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO). Between them, they own over 20,000 stores.

I’ve taken the competitors and broken out the metrics I consider most important.

Dollar Tree

Ninety-Nine Cent

Dollar General

Family Dollar

Market Cap

$7.5 billion

$1.4 billion

$11.1 billion

$6.4 billion

Employees

13,060

12,000

85,900

30,000

Revenue (TTM)

$6.1 billion

$1.4 billion

$13.4 billion

$8.2 billion

Rev/Employee

$465,000

$117,000

$156,000

$273,000

Gross Margin (TTM)

35.8%

40.8%

31.9%

35.7%

Operating Margin (TTM)

11.4%

8.1%

9.9%

7.4%

P/FCF

16.7

74.5

20.7

27.5

FCF (TTM)

$450 million

$19 million

$536 million

$232 million

Net Cash

$260 million

$200 million

($2.6 billion)

$188 million

Source: Yahoo Finance

How is this actionable?

Ninety-Nine Cent Stores gets blasted out of the ring. Despite having the best gross margins, it isn’t translating as strongly to bottom line profit or free cash flow. Dollar General is a bloated company on both the employee side and the debt side. Dollar Tree, at the moment, is vastly better priced on a price to free cash flow basis than Family Dollar. It is also pumping out more cash and has vastly better margins. They both have seen some margin improvement over the past year, but Dollar Tree has fared better. The company also has a history of keeping debt to a reasonable level (only $250 million), keeping cash on hand and producing strong cash flow. The company is expensive at 20x P/E, and with 13.7% projected compound annual earnings growth over the next five years, I see $1.82 in earnings in 2016. Slap a 18x multiple on it, to reflect a deserved premium for its brand name and operational superiority, and you have a $33 stock – a 65% increase from today’s price.

However – and this is a big however – my high school classmate and legendary hedge fund manager Bill Ackman just took a large position in Family Dollar. You can get a bit of his investment thesis here. One thing is for sure, Mr. Ackman is often right. If anyone can improve on Family Dollar, he can. That may lead to better returns over time.

Source: The Dollar Store Smackdown: Which Discount Retailer Is King?