What Icahn Sees: Dollar Stores vs. Discounters

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Now that Carl Icahn has taken a large stake in Family Dollar Stores Inc. (NYSE: FDO), 24/7 Wall St. wanted to see what sort of value this might imply for activist investors and value investors alike.

It turns out that none of the stocks are dirt cheap by any measure. Still, the growth in this segment remains a secular opportunity for investors who fancy themselves as part value investor and part growth investor.

We have included book value ratios here, although the first thing we would say is that book value in a retailer is something that may not be as relevant as other industries. It is the value of the total franchise that really matters here, and that is something that will vary greatly from buyer to buyer.

Included are forward price-to-earnings (P/E) ratios from next year using the Thomson Reuters consensus estimates. The prices are based on the closing bell prices on Friday and will be updated in the morning to reflect the prices on Monday after the levels settle down.

This is the valuation of the top dollar store and discount retail outfits that we follow. There are other companies with overlapping interests, but the idea is to try to keep things as close to an apples-to-apples analysis.

Where this gets interesting is that the dividends for the dollar stores and the discounters are just not impressive. Actually, that should be from not impressive to not paid at all.

Dollar General Corp. (NYSE: DG) has a price-to-book value of 3.64 to 1, and its market cap is almost $18 billion. Its forward P/E is about 14.3. Dollar General’s shares closed at $57.99, and the 52-week price range is $49.47 to $62.93. With a consensus target price of $63.89 from Thomson Reuters, Dollar General has an implied upside exceeding 10%. Dollar General pays no dividend, but that may change soon now that the private equity backers have sold out.

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Family Dollar Stores Inc. (NYSE: FDO) posts a 4.29-to-1 price-to-book value. Its market cap is $6.89 billion, and its forward P/E is less than 18. Family Dollar shares closed at $60.53, and the 52-week trading range is $55.64 to $75.29. With a consensus target price of $56.89, Family Dollar is now trading above its consensus price target by almost 6%. Family Dollar has a dividend yield north of 2%. For whatever this is worth, Family Dollar also just adopted a shareholder rights program. For those who are not familiar with proxy fights and activist investing, this is a poison pill trigger. Its intention is to dilute acquirers’ interests.