Seeking Alpha
Research analyst, value, growth at reasonable price
Profile| Send Message|
( followers)  

Shopping at dollar stores has become the norm for low and middle income shoppers especially since the 2008 financial crisis and recession. Interestingly, Kiplinger has identified good values for consumers over other retailers for the following dollar store products: party supplies, cleaning supplies, greeting cards, seasonal items, pregnancy tests, gift wrapping supplies, and cooking and dining accessories. No savings as compared to other stores were found on these items: vitamins, school supplies, medications, toys, canned foods, batteries, and electronics.

Good values in dollar store products can equal good values in the stocks of the leading dollar store retailers. I'd like to take a look at these three growing discount retailers to see which is the better buy.

Family Dollar Stores (FDO) is a $7.39 billion mid-cap North Carolina based discount retailer that will most likely grow into a large-cap retailer. As of March 28, 2012, the company operated 7,100 stores in 45 states.

Family Dollar looks fairly valued with a forward P/E ratio of 15.07, a PEG of 1.18, and a price to book ratio of 5.76. One positive highlight for the company regarding valuation is its low price to sales ratio of 0.79.

Here are some other Family Dollar highlights:

- Profit margin of 4.58% and operating margin of 7.56%

- Quarterly revenue growth of 8.6%

- Quarterly earnings growth of 10.7%

- Operating cash flow of $520.19 million and free cash flow of -$864,000

Family Dollar has a total of 21 upward earnings revisions for 2012 and 22 upward revisions for 2013. It has met or exceeded earnings expectations in its last three quarters. The company is expected to grow earnings annually at 14.7% for the next five years. This growth should allow the current stock price of $63 to grow to approximately $125 in five years.

Dollar General (DG) is a $15.81 billion large-cap Tennessee based discount retailer. As of March 2, 2012, the company operated 9,961 stores in 39 states.

Dollar General is also fairly valued with a forward P/E ratio of 14.48, a PEG of 1.07, a price to book ratio of 3.35, and a price to sales ratio of 1.05.

These are the other Dollar General financial statistics:

- Profit margin of 5.18% and operating margin of 10.16%

- Quarterly revenue growth of 20.1%

- Quarterly earnings growth of 31.4%

- Operating cash flow of $1.05 billion and free cash flow of $454.06 million

Dollar General has 30 upward earnings revisions for its current fiscal year and 22 upward revisions for the next fiscal year. It has exceeded its earnings estimates in its last three quarters. The company is expected to grow earnings annually at 15.6% for the next five years. This growth should allow the current stock price of $46 to increase to about $95 in five years.

Dollar Tree (DLTR) is a $10.98 billion large-cap Virginia based discount retailer. As of January 28, 2012, it operated 4,252 stores in 48 states and the District of Columbia. It also has 99 stores in Canada.

Dollar Tree looks fairly valued with a forward P/E ratio of 16.9, a PEG of 1.08, a price to book ratio of 8.12, and a price to sales ratio of 1.65.

Here are Dollar Tree's other financial statistics:

- Profit margin of 7.36% and operating margin of 11.81%

- Quarterly revenue growth of 12.8%

- Quarterly earnings growth of 15.6%

- Operating cash flow of $686.5 million and free cash flow of $404.36 million

Dollar Tree has one upward earnings revision for its current fiscal year and one upward revision for its next fiscal year. It exceeded earnings estimates in its last four quarters. Dollar Tree is expected to grow earnings annually at 17.87% for the next five years. This solid earnings growth should take the current stock price of $95 up to about $216 in five years.

click to enlarge

Conclusion:

The dollar stores have been growing well not just during and after the recession, but for the last ten years. All of them should continue to do well for the future. You can see from the chart that all of them are outpacing the performance of the S&P 500. If they meet their five year expected earnings expectations, these companies should continue to outpace the market.

Dollar Tree looks the best pick of the group. It has grown earnings at a rate of 31.14% annually for the past five years and has the highest expected earnings growth for the next five years. Personally, when shopping at these stores, Dollar Tree looks to be the standout in product selection and store appearance. Another good thing about Dollar Tree is that everything in the store is just $1.

There are no unpleasant surprises on price. The other two dollar chains have varying prices which takes the fun out of the treasure hunt for $1 items. Sometimes when shopping at Family Dollar, I wonder why it's called a dollar store when they have items priced at $3 & $5. Maybe I'm just whining like the late Andy Rooney, but if it's up to me, I'd pick Dollar Tree.

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

Source: The Best Buy Among The Dollar Stores