Is Family Dollar Worth Adding to Your Portfolio?

| About: Family Dollar (FDO)

By Jonathan Chen

Family Dollar Stores (NYSE:FDO) is set to report earnings tomorrow before the bell, and Wall Street will be looking forward to hearing how rising commodity costs are affecting the company's key consumer. The North Carolina-based company is going to report its third-quarter fiscal 2011 results, and Wall Street analysts are looking for 95 cents per share on $2.2 billion in revenues. This is up from last year, when the company reported earnings of 77 cents per share on $2 billion in revenues.

The company has been in the media lately, as Bill Ackman has become the company's largest shareholder, holding 8.9% of the stock. Ackman discussed his position at the Ira Sohn Conference last month, and said that he thinks the stock is eventually worth around $70 per share. The day of the conference, Ackman said his Pershing Square fund was buying shares left and right.

Nelson Peltz' Trian fund has been in discussions to take over the company, and had a contingent offer for the company at $55-60 per share. Shares are currently below that offer, closing at $52.33 yesterday.

It will be important to see if the company's management is working on the initiatives that Ackman discussed at the conference, as it tries to compete with Dollar General (NYSE:DG), its larger competitor. The company is currently yielding 1.4% and is trading at 14.4 times forward earnings, and Ackman suggested the company is undervalued at these levels if management can work on the initiatives to improve operating results.

If Family Dollar can report better than expected results, names like Dollar General, Ninety Nine Cents Only Stores (NDN), and Dollar Tree (NASDAQ:DLTR) could see some sympathy moves up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.