Berko: New Fed head and shares of discount stores
Friday, August 30, 2013 7:00 AM
Dear Mr. Berko:
Why is Federal Reserve Chairman Ben Bernanke giving up his post this January? I know the economy is still weak, but he certainly saved the country from a terrible depression and seems to be very popular with Congress and Wall Street, and the public seems to like his honesty. Do you think the market will go into a big tailspin when he is replaced? I think the economy will continue to be very soft for a while. Also, would you recommend Five Below or Dollar Tree for an investment in the retail sector?
S.S., Waterloo, Iowa
Bernanke may give up his post in January because he wants to spend more time with his son, Joel, his daughter, Alyssa, and his wife, Anna. That’s the official version. However, I’m told by a knowledgeable congressman that Bernanke and the Obama administration are at loggerheads regarding the financial problems of Chicago and Detroit. Unions want the administration to guarantee their underfunded pension plans so they can assure their members that their pension payments will continue as promised. And because Bernanke won’t allocate a portion of the $85 billion monthly stimulus to Chicago or Detroit, he may be axed out of his job next year. I don’t know whether Janet Yellen or Lawrence Summers will get the nod, but I’m told that both would be amenable to using some of the $85 billion monthly stimulus to guarantee future payments. But no matter who takes over as Fed head (it could be someone other than Yellen or Summers), it’s doubtful that person will be as communicative and as transparent as Bernanke. Yes, some folks believe that the market will boil with uncertainty for a period of time until that person establishes her or his bona fides with the Street, but most believe it will be a nonevent.
I used to think Five Below Inc. (FIVE-$36.93) was a retail store that sold winter clothing. However, FIVE is a 304-store retailer with a broad range of merchandise targeting teen and preteen customers, and all of its products are priced at $5 or less. Though prospects look promising, I’m concerned that the share price of this $530 million-revenue company, which has yet to make a profit, is overly rich. FIVE reminds me of the old Ben Franklin stores. I’m not impressed with its business model, its earnings or its management, and I don’t care to own the stock.
Dollar Tree Inc. (DLTR-$53.19) is a $7.8 billion-revenue company with 4,700 stores. It has a huge variety of merchandise: food, candy, toiletries, cleaning supplies, kitchen items, snacks, housewares, decorations, toys, beauty aids, stationery, gifts and the like. Management has recently been installing freezers and coolers in older stores, and this additional merchandise is beginning to improve revenues and earnings. Everything (even a dozen eggs) sells for a buck or less. And I can’t imagine why anyone would pay $3 for a large tube of popular toothpaste, $2.50 for a bar of name-brand soap and $4 for batteries when all these items and more can be bought for a buck at DLTR. Meanwhile, our government could reduce the cost of its food stamp program by 65 percent if all 46 million food stamp recipients were required to shop at a Dollar Tree. That could be an enormous savings for taxpayers. In the next five years, management believes that it can add another 2,500 locations. In that time frame, some analysts reckon revenues could increase by 50 percent, to $12 billion, and earnings could rise from this year’s $3.30 to more than $5 a share.
DLTR has 15 consecutive years of revenue and earnings increases plus very impressive net profit margins, especially for a company that peddles everything for a buck or less. This company has a clean balance sheet, less than $250 million of debt and 225 million shares out, and it has split twice in the past three years. And with a levered free cash flow of $400 million, it’s about time the mingy board declared a dividend. DLTR trades at a reasonable 15 times earnings, and I’d really rather own 100 shares of DLTR than I would 100 shares of FIVE.
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