Why Family Dollar (FDO) Stock Is Up Today

NEW YORK (TheStreet) -- Family Dollar  (FDO) rose Monday after a bidding war broke out between Dollar General  (DG)  and rival Dollar Tree  (DLTR) for the retailer.

Dollar General offered $9.7 billion, or $78.50 a share, for Family Dollar. Dollar Tree had previously offered $8.5 billion, or $74.50 a share, for the dollar store retailer in July.

The merged company would have nearly 20,000 stores in 46 U.S. states. Dollar General said it expects revenue to reach $28 billion and expects the deal to generate synergies of $550 million to $600 million three years after the deal closes should Family Dollar accept it. Dollar General also expects the merger to lead to double-digit adjusted earnings per share growth in the low double digits in the first full-year following the deal, less the costs tied to the merger.

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Family Dollar stock was up 4.52% to $79.50 at 9:47 a.m. More than 9.1 million shares had changed hands, compared to the average volume of 2,732,250.

Separately, TheStreet Ratings team rates FAMILY DOLLAR STORES as a "buy" with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate FAMILY DOLLAR STORES (FDO) a BUY. This 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 revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • FDO's revenue growth has slightly outpaced the industry average of 5.7%. Since the same quarter one year prior, revenues slightly increased by 3.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The current debt-to-equity ratio, 0.47, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.20 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Multiline Retail industry and the overall market, FAMILY DOLLAR STORES's return on equity exceeds that of both the industry average and the S&P 500.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • FAMILY DOLLAR STORES's earnings per share declined by 32.4% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, FAMILY DOLLAR STORES increased its bottom line by earning $3.83 versus $3.58 in the prior year. For the next year, the market is expecting a contraction of 19.3% in earnings ($3.09 versus $3.83).
  • You can view the full analysis from the report here: FDO Ratings Report

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Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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