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Dollarama Inc. (TSX:DOL), the largest owner and operator of dollar stores in Canada, has widely outperformed the overall market in 2015, rising over 47% as the TSX Composite Index has fallen over 5%, and I think it could continue to do so for the next several years. Let’s take a look at four of the primary reasons why this could happen and why you should consider making it a core holding today.
1. Its strong financial results could support a continued rally
On September 10, Dollarama announced very strong earnings results for its three and six-month periods ending on August 2, 2015, and its stock has responded by rising over 9% in the trading sessions since. Here’s a summary of 10 of the most notable statistics from the first half of fiscal 2016 compared with the first half of fiscal 2015:
- Net income increased 31.2% to $160.25 million
- Earnings per diluted share increased 36.7% to $1.23
- Revenue increased 13.6% to $1.22 billion
- Comparable-store sales increased 7.4%
- Gross profit increased 18.3% to $454.37 million
- Gross margin expanded 150 basis points to 37.3%
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 29.8% to $252.78 million
- EBITDA margin expanded 260 basis points to 20.7%
- Operating profit increased 30.1% to $229.85 million
- Operating margin expanded 240 basis points to 18.9%
2. Its stock trades at inexpensive forward valuations
At current levels, Dollarama’s stock trades at 31 times fiscal 2016’s estimated earnings per share of $2.83 and 27.1 times fiscal 2017’s estimated earnings per share of $3.23, both of which are inexpensive given its current growth rate, the latter of which is inexpensive compared with the industry average price-to-earnings multiple of 29.1.
I think the company’s stock could consistently trade at a fair multiple of at least 32, which would place its shares upwards of $90.50 by the conclusion of fiscal 2016 and upwards of $103.25 by the conclusion of fiscal 2017, representing upside of more than 3% and 17%, respectively, from today’s levels.
3. It has ample room for expansion
At the conclusion of the first half of fiscal 2016, Dollarama reported a total store count of 989, an increase of 72 from the end of the year-ago period. I think the company could add at least 100 net new stores per year over the next five to 10 years, bringing its total store count to over 1,500 by 2020, and I think it could do this without ever running into issues related to market densification.
4. It has increased its dividend for four consecutive years
Dollarama pays a quarterly dividend of $0.09 per share, or $0.36 per share annually, which gives its stock a 0.4% yield at current levels. A 0.4% yield is far from impressive, but it is very important to note that the company has increased its dividend for four consecutive years, and its strong operational performance and low payout ratio could allow this streak to continue for another four years at least.
Is now the time for you to buy shares of Dollarama?
I think Dollarama could continue to outperform the overall market going forward. Its very strong earnings results in the first half of fiscal 2016 could support a continued rally, its stock trades at inexpensive valuations given its current growth rate, it has ample room for expansion, and it is a dividend-growth play, which will amplify the potential returns for investors going forward. All Foolish investors should strongly consider making it a core holding today.
