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Two Picks to Become the Next Wal-Mart Stores, Inc. (WMT): Family Dollar Stores, Inc. (FDO), Dollar General Corp. (DG)

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When the first Wal-Mart Stores, Inc. (NYSE:WMT) store opened its doors on July 2, 1962, nobody thought it would become the largest retail chain in the world, but it did. It did it by identifying and filling a consumer need in the market. The Wal-Mart brand grew into a global powerhouse by locating stores in small communities that were viewed as being too small by the larger chains. Sam Walton was right and his large, successful competitors were badly mistaken. Once he had built the chain into a formidable operation, he then moved into the major market areas and began to decimate the competition.

Wal-Mart Stores, Inc (NYSE:WMT)

Today, we have an opportunity to invest in what could be the next generation of Wal-Mart Stores, Inc. (NYSE:WMT)and profit from the long-term growth prospects they possess. Wal-Mart and the parent of K-Mart, Sears Holdings Corporation (NASDAQ:SHLD) , are the discount variety store growth stories of the last generation. The new growth stories in this arena appear to be the up and coming names of Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) and the best news these smaller, faster growing competitors can be bought at about the same fundamental valuations as one of the world’s best business models today, Wal-Mart. When compared to the valuation being given to Sears in the market today, these two smaller operations are simply screaming to be bought.

Typically, investors expect to pay a premium for a small faster growing business as compared to the valuation multiple assigned to a more mature, slower growing business within the same industry space; unless, of course, the smaller businesses had some glaring issues with their financial performance compared to the larger competitor. That does not seem to be the case here as evidenced by a review of the numbers.

Business                                           FDO           DG               WMT               SHLD

5-yr. avg. return on equity                26.3%      11.3%            21.9%             -4.1%

5-yr. avg. return on assets              11.7%         4.3%              8.8%              -1.3%

5-yr. avg. return on capital              18%              5%              13.6%             -2.1%

Revenue/Employee                    $291,043   $177,773       $235,000       $136,785

Income/Employee                       $12,793      $10,308          $13,900          -$9,638

5-yr. avg. gross margin                 34.9%          30.7%             25.1%             27.1%

5-yr. avg. net margin                       4.2%            3.1%                3.7%              -0.8%

Price/Cash Flow                            10.6             10.4                   9.2                    N/A

Price/Earnings                              16.36           17.40               14.47              -25.89

FWD. P/E                                      13.17           14.54               12.35               -25.51

5-yr. projected growth rate             13%           17.7%               9.6%                 N/A

Debt/Equity                                    0.54             0.64                  0.71                   1.04

Interest Coverage                          27.5             11.7                 13.5                    -3.9

Dividend/Yield                        $1.04/1.76%       N/A            $1.88/2.6%             N/A

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