Family Dollar (FDO) became a must-have after Carl Icahn announced a 9.4% stake in the bargain retailer–and so did competitors like Dollar General (DG) and Dollar Tree (DLTR).
REUTERS Carl Icahn Guggenheim’s John Heinbockel and Steven Forbes explain why they’re bullish on Family Dollar:
Following Carl Icahn’s disclosure of a 9% stake in FDO, we reiterate our contrarian BUY, believing that significant shareholder value can be created in this well-positioned but underperforming and overcapitalized business. Our focus remains on a turnaround, not consolidation…
We would note that the 100 basis points plus of EBIT margin expansion we have built into our model represents the recovery of only 50% of the erosion seen since 2011 and would still leave a level of profitability well below that of both Dollar General (DG, BUY, $57.99) and Dollar Tree (DLTR, NC, $55.14). There are opportunities beyond what we have modeled to the degree that costs are better controlled and pricing is better managed.
The filing notes that the shares are "undervalued" and Icahn "sees great long-term potential in the issuer's (FDO's) industry" and that it "intends to seek to have conversations with senior management and the BOD.”—anything that further accelerates the pace of change is a positive.
Family Dollar, however, has adopted measures to keep Icahn at arm’s length following the filing.
Shares of Family Dollar have gained 14% to $68.78 at 3 p.m., while Dollar General has risen 7.5% to $62.32 and Dollar Tree has advanced 0.5% to $55.43.
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