Value Trap or Value... Family Dollar Conundrum (FDO, WMT, DG)

Family Dollar Stores Inc. (NYSE: FDO) now has a serious issue for its shareholders to consider this weekend. The dollar store chain has rejected a $7.6 billion buyout offer from Nelson Peltz.  While investors have to now wonder what value the company is really worth, there is now a poison pill in place after the company adopted a shareholder rights plan.  What could have been a $55 to $60 buyout price is now a $50.50 share price after only a 1% drop in the stock.  The highest price that Family Dollar saw on its own was $55.62.

Before the offer surfaced, shares were valued around $44.00.  We initially took a look at the premium and compared and contrasted the other dollar stores to see if there was value remaining or if Nelson Peltz was creating a value trap for himself and for shareholders hoping for more.

The value trap scenario looks and feels more likely today.  Even at today’s share price that is 10% under the initial Peltz level, the stock trades at more than 16-times current 2011 earnings expectations.

Billionaires are generally different from the rest of us.  Maybe he had insight or maybe there was a hidden value that only Nelson Peltz knew about.  Investors will be considering this and more when trying to decide this weekend whether they want to own Family Dollar or whether they should be looking elsewhere as the dollar store trends are taking away from Wal-Mart Stores, Inc. (NYSE: WMT) and others.

Dollar General Corporation (NYSE: DG) has come significantly off of its highs and we continue to see more value there than in Family Dollar shares.  After all, Dollar General was our only retailer which made it in our “Stocks for the Next Decade” screen.

JON C. OGG