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TSC Ratings' Updates: Family Dollar

Each business day, Ratings updates its ratings on the stocks it covers. The proprietary ratings model projects a stock's total return potential over a 12-month period, including both price appreciation and dividends. Buy, hold or sell ratings designate how the Ratings group expects these stocks to perform against a general benchmark of the equities market and interest rates.

While the ratings model is quantitative, it uses both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and company earnings forecasts. Objective elements include volatility of past operating revenue, financial strength and company cash flows.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and that it should be part of an investor's overall research.

The following ratings changes were generated on July 10.

Family Dollar (FDO), which operates a chain of neighborhood retail discount stores, was upgraded to buy. The basis of the upgrade is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover.

The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share and attractive valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow. In the latest quarterly results, revenue slightly increased by 2.9% from the same period last year--underperforming the industry average of 8.6% revenue growth. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share. Net income increased to $64.67 million from $60.37 million it earned in the same quarter last year, an increase of 7.1%.
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