Stock Picks: FDO Up, AXL Down

Bad times remain good news for discounters like Family Dollar Stores (FDO), which handily beat Wall Street estimates for its fiscal third-quarter earnings. Applauding the news, investors boosted the company's shares by as much as 10% in early trading Wednesday.

The Matthews, N.C.-headquartered chain of discount stores reported fiscal third quarter earnings of 62 cents a share, exceeding its own guidance of 58 cents a share and setting a company record for the period. Profits rose 36% from 46 cents a share a year ago.

Citing strong sales of consumer staple items, the company boosted its full-year guidance to $2.03 to $2.07 a share for its fiscal year, an increase from its April forecast of $1.90 to $2 a share. For the fiscal fourth quarter, Family Dollar said it expects earnings of 39 cents to 43 cents a share. On average, Wall Street analysts expect the company to report earnings of 39 cents a share.

"As economic pressures have increased over the last few years, [the typical Family Dollar customer] has adjusted quickly, consolidating shopping trips, curtailing discretionary purchases, and increasing her reliance on coupons and promotion use for basic needs," said Chairman and CEO Howard Levine said Wednesday. "Using insights from customer research we have expanded assortment of consumables, notably food, to satisfy more fill-in trips."

Wayne Hood, an analyst at BMO Capital Markets, projects 11% annual earnings growth for the company and, in a Monday preview note, called for strong sales and solid margin expansion. Sales of consumables, including food, rose 13% in the quarter.

More broadly, analyst Robert Summers at Pali Capital wrote Tuesday that as of April, the $4.4 billion year-over-year increase in food stamp use would benefit Family Dollar as it adds technology that will allow it to accept food stamps from customers.

"The Dollar stores rolling out technology enabling stores to accept food stamps will be the largest beneficiaries from the additional $15 billion in food expenditure, in our opinion," he wrote Wednesday. "We expect these stores to increase share of wallet. We continue to recommend FDO as the best way to play this trend."

Bottom Line: Buy
It's a bad state of affairs when a store catering to the hardest hit victims of the recession is thriving. Nevertheless, Family Dollar is poised for solid growth ahead.

Shares of auto parts maker American Axle & Manufacturing (AXL) continued to slide for the third consecutive session Wednesday after the company announced that it had altered its credit obligations in an effort to avoid filing for bankruptcy protection. Shares were down 11% in midday trading and have fallen 36% since the Friday close.

Auto parts makers are yet another victim of the ongoing shutdowns of U.S. auto plants run by Chrysler, General Motors and Ford (F). Lear, which makes seats and electronics, for example, filed for bankruptcy protection Tuesday.

American Axle is the main supplier of axles for General Motors, which filed for bankruptcy protection in early June, and it has battled for survival as its main customer's fortunes sink ever deeper.

On Tuesday, the company filed notice with the Securities and Exchange Commission that it managed to alter its loan agreement and has until the end of July to meet the terms of its debt. The filing said it must maintain daily minimum liquidity of $100 million – the company listed $280 million in cash, short-term investments and existing capacity on its revolving credit facility. The company said its ability to meet the terms of its agreement with lenders JPMorgan Securities (JPM) and Banc of America Securities (BAC) will depend in part on "whether GM will continue to obtain sufficient funding from either governmental or private sources."

Wall Street Strategies analyst David Silver wrote Tuesday that improvements seem unlikely and urged investors to get out, reiterating a Sell recommendation. He expects the stock to drop to $1.75 a share, and wrote that "the future continues to have a negative bias with no significant change on the horizon."

Silver said American Axle "will have to scramble to come up with the payments" at the end of the month.

Bottom Line: Sell
Anyone hanging on in hopes of a government-backed turnaround has already hung on far too long.