Is Family Dollar Stores a Good Portfolio Play?

With shares of Family Dollar Stores (NYSE:FDO) trading around $68, is FDO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Family Dollar Stores operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. Its merchandise assortment includes consumables like household chemicals, paper products, food products, health and beauty aids, hardware and automotive supplies, pet food and supplies, and tobacco; as well as home products comprising blankets, sheets, towels, housewares, giftware, and home décor products. The company also provides apparel and accessories consisting of men’s and women’s clothing products, boys’ and girls’ clothing products, infants’ clothing products, shoes, and fashion accessories; and seasonal and electronic products, such as toys, stationery and school supplies, and seasonal goods, as well as personal electronics, including pre-paid cellular phones and services.

Carl Icahn on Thursday night demanded Family Dollar be put up for sale “immediately.” Family Dollar’s response: Thanks, but we’ve got this. After Icahn initially reported his stake in the discount retailer, Family Dollar adopted a “poison pill” provision, which prevents any one shareholder from acquiring more than 10 percent of the company. Now, Family Dollar is going to have to try harder to ward off Icahn. In a statement following Icahn’s letter, Family Dollar said the company’s board and management is “committed to acting in the best interest of the company and our shareholders.” Family Dollar added that it is “always open to constructively communicating with our shareholders with the shared goal of enhancing value.”

T = Technicals on the Stock Chart Are Strong

Family Dollar Stores stock has seen its fair share of volatility over the last couple of years. The stock is currently trading near highs for the year and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Family Dollar Stores is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Family Dollar Stores options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Family Dollar Stores options

33.36%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Friday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Family Dollar Stores’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Family Dollar Stores look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-33.88%

-1.45%

28.58%

-0.94%

Revenue Growth (Y-O-Y)

-6.12%

3.22%

5.84%

9.07%

Earnings Reaction

-3.21%

-2.06%

-1.06%

7.11%

Family Dollar Stores has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Family Dollar Stores’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Family Dollar Stores stock done relative to its peers – Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), and Wal-Mart (NYSE:WMT) — and sector?

Family Dollar Stores

Dollar General

Dollar Tree

Wal-Mart

Sector

Year-to-Date Return

5.25%

3.37%

-4.95%

-4.04%

-1.09%

Family Dollar Stores has been a relative performance leader, year-to-date.

Conclusion

Family Dollar Stores operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. Carl Icahn on Thursday night demanded Family Dollar be put up for sale “immediately.” The stock has seen its fair share of volatility over the last couple of years but is currently trading near highs for the year. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, Family Dollar Stores has been a year-to-date performance leader. Look for Family Dollar Stores to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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