Turning $1 into $1.6 billion

Dollar stores' stocks rival their wares for great value.

By InvestorPlace Jan 24, 2012 10:40AM
ballyscanlon/Digital Vision/Getty ImagesBy Lawrence Meyers

Fifteen years ago, I walked into a 99 Cents Only store. Being an unemployed graduate student, I was eager to save as much money as I could while buying the things one needs to live one’s life. I discovered that you get what you pay for. After loading up on dish soap, paper towels and other staples, I found the quality to be absolute garbage. I vowed never to waste my time or money again.


But a few years ago, I sauntered into a Dollar Tree (DLTR) because the stock had been doing well and I couldn't fathom why that was the case. How could there be tens of thousands of these dollar stores when all they sold was junk? As it turns out, they didn't sell junk anymore. They sold brand-name merchandise. I became a fan.


Evidently, so has the world of private equity and hedge funds. They've taken notice of these stores' great margins, increasing market share and growing earnings (some at 20% annually). I thought it was amazing when hedge fund manager Bill Ackman purchased a ton of stock in Family Dollar (FDO). Warren Buffett also took a stake in Dollar General (DG). These, however, are nothing compared to the $1.6 billion private buyout of 99 Cents Only Stores that recently just closed.


What does this tell us about the present valuations of the dollar stores -- and whether any of them are buys?


The $1.6 billion price tag for 99 Cents Only was 21.6 times 2011 earnings of $74 million, and 1.1 times sales. Dollar Tree's trailing 12-month earnings are $463 million, so a 21.6 multiple puts its present value right at $10 billion, or exactly what DLTR trades at today, although that is 1.5 times sales.


Family Dollar has $394 million in TTM earnings, and giving it a 21.6 multiple yields $8.5 billion, which is 1 times sales. With only $250 million in net debt, that suggests Family Dollar -- presently trading at a market cap of $6.46 billion -- might be undervalued by as much as 30%. With the stock trading at $55, it suggests it might be worth closer to $70. Perhaps Mr. Ackman is on to something here.


Dollar General is the big kahuna, with TTM net income of $698 million. That 21.6 multiple would make it worth a whopping $15.08 billion, also representing about 1.07 times sales. The present market cap is $14.04 billion, suggesting a modest premium of 7% exists, which might make the stock worth $44. But hang on -- DG carries $2.6 billion in net debt, so that wipes out that premium and then some.


Strictly examining the stores on the basis of the buyout, then, it appears Family Dollar is drastically undervalued. It certainly has room for improvement operationally, and Mr. Ackman is known for finding companies that could use fresh eyes and a different approach. I think if you put your faith in Mr. Ackman, you won't be disappointed.


I've always liked Dollar Tree because of its consistency, however, so given its expected 20% earnings growth, it's likely you won't go wrong there, either.


If you're looking to stretch your dollar even further, check out these three highly-recommended stocks you can buy for under $10.


As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.


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9Comments
Jan 24, 2012 4:12PM
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I agree with Jean,

You cannot buy the same brand name for.99 when target and wall mart are selling supposedly the same thing for 3 times the cost.

You get what you pay for!

Read the labels and check the manufacturer and country of manufacture. The size, thickness, or quantity may be less at a dollar store to make the price more efficient.

Of course there are some cheap things that are only worth a $1 and sell for more at other places, so the dollar store does have a place. We all need to be smart shoppers to know the true value of certain products.

Jan 24, 2012 7:51PM
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I don't shop there because it's a lot of crap from China.  NO thanks.  I like my toothpaste made in the good ole USA!
Nov 11, 2012 4:15PM
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I need a credit card as soon as her .. I do not have a credit card ..
Jan 24, 2012 7:50PM
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There are ways to sell stuff for .99 cents or less. Can't do that on ebay of course because their fee's have become so out of this world that the only one making a buck there is ebay. But if you really want to get rich with out paying huge fee's one should go check out this new website I found that has no fees and they'll even help you with a wholesale drop shipper that offers products for under 30 cents. I have made a little over 5k for the month of December and prob. clear even more this month. Go check it out....Clean Up My City dot net
Jan 24, 2012 8:01PM
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What's my take on Dollar Tree Stores?

I volunteer at the Provo,Utah Food and Shelter Coalition Soup kitchen.Many times they need assorted cleaning chemicals such as bleach,ammonia,oven cleaner,generic windex like glass cleaner.Absolutely,I will buy chemicals from Dollar tree in Provo in half gallon sized containers and drive it over.

 

Onteora Scout Reservation was at one time the 3rd largest camp of the Boy Scout Program.Board of health statutes in New York State are pretty stringent for summer camp operations. A Dollar Tree store is within a 7 mile drive of the camp ranger's residence.I successfully lobbied camp leadership to use Dollar Tree products for cleaning sanitation issues. Yes,the camp DID pass Board of Health annual inspections.

 

I propose utilizing Dollar Tree as a supplier. With shrinking budgets for groups to run with,this venue might address issues of cutting costs without cutting quality of operation.

 

Tony Marren

Founder

Operation Just One Can

Provo,Utah

Jan 24, 2012 3:42PM
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ok let ask this question, if the 99 cent store can sell brand name and you can get it for the 99 cents, why in the world would a competitor, Wal-Mart , target grocery stores and all the others sell for so much more and make billions,  where as the 99 cent store you save so much and they still make their billions. Hmmmmm what kind of merchandise is this, , are they the same or from a sister manufacture to label it the brand name but not the same . It gets a little confusing  doesn't it.  So my point is we the people are still getting ripped off by the same people.  The sister manufacture is making the same as the primary manufacture and distribute to the 99 cents stores , why cant they do the same with the Wal-Mart target and others.

Its like Wal-Mart wanting to help with the "green" effect. hahaha. they stop plastic bags then charge you for the semi cloth and act as though their doing good. Their making another corporation in manufacturing of the bags. their double charging in a way , its another greed of crap done in the so called legal systems.

 

Jan 24, 2012 2:49PM
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In these hard times, the 99cent store is an alternative to the soup kitchen.  I do not understand why more people do not shop there.  But then again, why are there so many people going without.Smile  
Jan 24, 2012 3:50PM
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40% for me once a tweet or click ok

Jan 24, 2012 4:16PM
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Jlum,...there a a lot of people that don't even have a dollar to spend, that's why

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