With a presence primarily in the southeastern U.S., Fred's (NASDAQ:FRED) isn't as well known as other discount general-store operators. From its humble beginnings in Coldwater, Miss. -- where it opened its first site in 1947 -- the company now has 648 stores. Fred's still has plenty of room to grow, making this a possible opportunity for interested investors.

Fred's added 65 new stores in 2005, increasing its unit count by 11%. In 2006, it plans to increase its selling base by an additional 8% to 10%. Fortunately, the company says that it is able to fund much of the expansion with its cash flow.

When you figure in its unit growth rate, together with comparable same-store sales projections for the year of 3% to 5%, the company anticipates a sales increase of 11% to 15% for 2006. Fred's earnings-per-share is also estimated to increase at roughly the same rate, to $0.71 to $0.77.

The company's valuation, roughly 17 times 2006 earnings, is reasonable given its estimated blended growth rate of about 13%, its tight control over inventories -- up 10% year over year and consistent with its square footage increases, a small dividend yield, and its long-term expansion opportunities. All told, there are ample reasons to take a look at Fred's at current prices.

Prospective investors need to be aware, however, that there is a reason this stock has been weak. It just completed a "difficult" 2005, what management described in its fourth-quarter earnings conference call as the "most volatile year they've seen in a decade." Dramatically higher maintenance repair costs (associated with the hurricanes), skyrocketing energy costs, and "unfavorable regulatory changes" in the pharmacy industry were among the hurdles it faced. Despite these challenges, the company increased fourth-quarter sales and operating earnings by 11% and 16%, respectively.

Looking ahead, a recently implemented Merchandising Refresher program should help keep product offerings more relevant, aiding comps that increased 2.5% for the quarter but saw a 0.5% decrease in average customer transaction. Finally, the company is doubling its available resources for pharmacy-related acquisitions, since it has identified this market as a key growth strategy going forward.

Despite the stock weakness, the company has no plans for a share buyback program, since CEO Michael Hayes does not believe it is "an appropriate use of capital." (Fred's has other plans in mind to grow its business.) However, with further investigation, an investment in this stock at this level may indeed be a proper use of a Fool's capital.

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Fool contributor Jeremy MacNealy does not have any financial interest in any companies mentioned.