Wednesday, October 05, 2011

Costco Wholesale (NYSE: COST) is on a roll and Wednesday it report a strong quarter -- but not as strong as expected. Would you be better off buying stock in Family Dollar (NYSE: FDO) or Target (NYSE: TGT)?

Costco missed the target Wall Street expected it to hit. Instead of posting Wall Street's expected 13% increase in fourth quarter profit on $27.6 billion in revenue, Costco fell short in reporting $1.08 a share, that was two cents less than expected and an 11% increase.

That's still a strong increase and it happened because with the economy weak, people are willing to pay its membership fee to get access to the bargains in its stores. And its growth has been helped by opening stores in the U.S. and internationally.

And Costco is not sitting still. It announced Wednesday that it would raise the fees it charges its members --  by $5 for U.S. individual and business members and Canada business members beginning November 1. This move is likely boost its revenues, unless people decide that the increase is too high leading to a drop in Costco's membership count.

Family Dollar reported an 8% increase in its fourth quarter profit reported September 28. Since consumers are looking for bargains, Family Dollar plans to open more stores than it closes in the next year.  It will add between 450 and 500 new stores in its current fiscal year while closing up to 100 poorly performing locations. In the year ahead, it's looking for an 8% to 10% sales increase.

The key to Family Dollar's growth is that its selection appeals to people who are being stung by the weak economy.  Its merchandise falls into four categories: consumables, home products, apparel and accessories, and seasonal and electronics. And it sells those products at prices ranging from ––under $1 to $10.

But it's not just the lowest-priced retailers that are doing well. Target had a strong second quarter report in August. Its profit of $704 million was 3.6% higher than the previous year whiles its sales rose 5.1%. And Target beat analysts' expectations of $0.97 a share by six cents.

So should you shun Costco for missing its numbers and buy Family Dollar and Target? No -- consider Family Dollar, shun the others. Here's why:
  • Costco: growing,barely profitable company; over-priced stock. Costco revenues were up 8.1% to $85 billion in the last year while its net income popped 20% to $1.4 billion yielding slim 1.6% profit margin. And its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a an over-valued 1.68 with a P/E of 25.6 on earnings forecast to grow 15.2.% to $3.82 in 2012.
  • Family Dollar: growing, profitable company, fairly priced stock. Family Dollars revenues are up 8.7% in the last year to $8.6 billion and its net income rose 8.5% to $388 million while it earned decent 4.5% net profit margin. And its PEG is reasonable 1.08 on a P/E of 16.5 on earnings forecast to grow 15.3% to $4.19 in 2012.
  • Target: slowly growing, profitable company, way over-priced priced stock. Target revenues are up 3.1% in the last year to $68 billion and its net income exploded 17.4% to $3 billion while it earned a solid 4.4% net profit margin. And its PEG is grossly over-valued 8.65 on a P/E of 22.5 on earnings forecast to grow 2.6% to $4.32 in fiscal 2013.
Family Dollar looks cheap and well-positioned to capitalize on continued economic weakness.


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