When Family Dollar Stores (NYSE: FDO) announced earnings on January 6th which merely met analysts revenue and earnings estimates, their shares were savaged. Disappointed shareholders knocked $3.50 off the share price pushing the stock to technical support around $53.70, near the 50-week moving average.
Shareholders' reaction to the announcement has created a big opportunity for traders for several reasons...
First, with continued economic weakness, FDO which sells low-priced food items, apparel, electronic goods and seasonal products is likely to continue luring in cost-conscious consumers.
There are currently 7,120 Family Dollar Stores across the U.S. In 2012, the company plans to open between 450 to 500 new stores, while closing 80 to 100 less-profitable locations. By increasing its store presence, the company should continue tapping into a growing customer base hungry for low-priced items.
Second, Family Dollar Stores plans to further drive sales by offering more competitive pricing, enhancing inventory management, offering longer store hours and expanding merchandise selection.
From a technical perspective, Family Dollar Stores shares are off nearly $7 from their peak. The small white harami candle which formed this January 9th treading week suggests the majority of the selling pressure was experienced on the day and immediately after the earnings release and that bargain hunters are moving back into the stock at current levels.
| |
FDO shares have been on a Major uptrend for the past two years. Over this time, the stock has nearly doubled, from a low near $30 in January 2010, to a high near $60 in October 2012.
From October 2012 until recently, the stock traded in a narrow range between $55 support and $60.34 resistance. This trading activity formed a rectangle consolidation pattern.
On last Friday's earnings news, the rectangle resolved bearishly. Support at $55 was breached and the stock plummeted approximately 6%, from an intraday high of $56.50 to an intraday low of $53.03. Shares tested major support, marked by both the Major uptrend line -- which intersects around $53.80 -- and the 50-day moving average.
This January 9th trading week, shares have held $53 support. So long as the stock doesn't buckle, shares should slowly continue to regain lost ground. If the stock can successfully challenge $55 -- the previous support and current resistance level - it could climb back to its $60 high.
As a result, I recommend that more risk-averse traders enter the position with caution by setting a buy-on-stop order just above current resistance, at $55.09, for potential 18% gains.
Despite the market's bearish reaction to earnings news, there were many positives in the report.
First-quarter revenue hit a record high of $2.15 billion, up 7.6% from $1.99 billion in the year-ago period. However, the stock was heavily sold because sales came in slightly below analysts' expectations of $2.17 billion. Growth was below projections because sales came primarily from lower-margin consumable goods, like food, as opposed to higher margin items such as clothing and toys. However, same-store-sales -- a central indicator of retail health -- rose 4.1%, due to increased customer traffic especially over the holiday season.
With demand expected to continue for low-cost consumables, analysts' estimate second-quarter revenue will increase 8.7% to $2.46 billion, from $2.26 billion in the year-ago quarter. Over the quarter, the company plans to add 300 new food items to its store offerings. With this strategy, the company expects same-store-sales will rise 5% in the comparable second-quarter.
For the full 2012 year, analysts' project revenue will rise 8.8% to $9.3 billion, from $8.55 in 2011. Management predicts full-year comparable store sales will increase 4 to 6% from the year earlier.
The earnings outlook is also strong.
First-quarter earnings met analysts' expectations of $0.68 per share, increasing 17.2% from $0.58 per share in the comparable year-ago period. Strong demand for low-cost consumable and seasonal items drove growth.
For the upcoming second-quarter, the company expects earnings to be between $1.10 and $1.18 per share, up at least 12.2% from the $0.98 earned in the comparable year-ago quarter. For full-year 2012, management reaffirmed its earnings guidance of $3.50 to $3.75 per share, up at least 12.2% from full-year 2011.
In addition to a solid growth outlook, the company is attractively valued based on its PEG ratio (price to earnings divided by growth rate) of approximately 1 (16.6/15). The company also has a low price-to-sales ratio of approximately 0.73.
Risks to consider: With the stock testing technical support, if it breeches this level it could go lower before it turns higher. Also to maintain growth, FDO will need to continue offering competitive pricing to keep up with its main rival, Wal-Mart (NYSE: WMT). This strategy could impact profit margins in the longer-term.
Given the short-term technical risk and the longer-term profit margin risk, I will purchase the stock with caution. placing a buy-on-stop order at $55.09, meaning I will only purchase the stock if it hits or goes above this price. I have set a target above the October high at $64.98 -- I believe the company's strong fundamentals will eventually be rewarded by the marketplace.
No comments:
Post a Comment