Bill Ackman Thinks You Can Get $70 For A Dollar

Speaking at the Ira Sohn Investment Conference yesterday, Pershing Sqaure's Bill Ackman gave out a passive idea that if he's right, will give you $70 for every dollar. Ackman was talking about Family Dollar Stores, Inc. FDO, which he believes has significant upside from these levels. The stores are much more convenient than Wal-Mart WMT, as consumers spend an average of 10 minutes in the stores on their trips. It's a remarkably good business because of this. Family Dollar and its dollar store competitors compete for the same customer as drug stores, supermarkets and Wal-Mart, but Family Dollar charges 20% less than drug stores and 15% less than supermarkets. Wal-Mart beats on price, to the tune of 5%, but a lot of their customers can't go to Wal-Mart because of the distance traveled to get there. Same store sales are growing nicely, and the sales mix of goods is improving. Ackman said he sees substantial long term growth opportunity in Family Dollar. The company offers a high return on capital, and it spends its money intelligently, on new stores and renovations. The company spends around $325,000 on a new store, and the company earns anywhere from 37 to 50% on this investment. With renovations, the company spends $115,000, and earns between 30 and 40% on renovations. It's currently in the middle of a $750 million buyback program, and Family Dollar's management believes it can reaccelerate growth to 5 yo 7%. The company's biggest competitor, Dollar General DG has done much better since KKR took it over, cleaned it up, and spun it back to the public. Dollar General has higher margins, sales per square foot, and faster growth. The company has also increased the hours its stores are open. Ackman said that management is working to close the gap, by increasing private label goods, globally sourcing things, improved pricing, and cutting shrink. Ackman said Family Dollar should have meaningful outperformance if these improvements occur. Shares are very cheap, trading at 14.7 times earnings, and if Family Dollar can close the gap to Dollar General, you could see a potentially 70% return on your investment. There is the potential for strategic alternatives here as well, as Trian is trying to buy the company. Company management didn't like the Trian bid, and implemented a poison pill. Despite this, the shareholder base is more optimistic, and Ackman even said Pershing was buying all day yesterday before he spoke. There could also be a strategic buyer could happen, perhaps Dollar General, or perhaps KKR or Blackstone. A strategic buyer could pay a 50% premium for Family Dollar, which would be worth more than the Trian bid. Ackman also said Family Dollar is an attractive LBO candidate. Ackman finished by saying you could see Family Dollar trading in the high 70's if everything pans out.