Could Dollarama Inc. Rally Another 30% in 2015?

Dollarama Inc.’s (TSX: DOL) stock has risen more than 30% in 2014 and it is well positioned to continue higher in 2015. Should you be a buyer today?

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Dollarama Inc. (TSX: DOL), the leading owner and operator of dollar stores in Canada, has been one of the best performing retail stocks in 2014, rising more than 34.5%, far outperforming the TSX Composite Index’s return of about 7.6%. The stock has gained steam in recent weeks, including a gain of more than 25% since October 1, and I think there is still plenty of room to the upside, so let’s take a look at three of the primary reasons you should consider investing in Dollarama today.

1. The industry leader with plenty of room to grow

As mentioned before, Dollarama is the leading owner and operator of dollar stores in Canada, and it currently operates 928 stores across all 10 provinces. The company has opened a total of 54 new stores year-to-date in fiscal 2015, putting it on pace to reach its goal of opening 70-80 for the year.

In the long-term, I think Dollarama could easily have over 1,500 locations in Canada, which would allow it to reach every major market and I think it could do this without running into issues related to market densification. Furthermore, I think Dollarama could explore expanding into the highly competitive U.S. market, where there is a very strong demand for dollar stores and where Dollar General, Dollar Tree, and Family Dollar have over 20,000 locations combined.

2. Strong earnings growth to support a continued rally

On December 4, Dollarama released record third-quarter earnings and its stock has responded by rallying more than 12% in the weeks since. Here’s a breakdown of what it accomplished compared to the year-ago quarter:

  • Earnings per share increased 26.4% to $0.55.
  • Revenue increased 12.4% to $587.97 million.
  • Same-store sales increased 5.9%, including a 4.8% increase in the average transaction size and a 1.1% increase in the number of transactions.
  • Gross profit increased 11.3% to $216.16 million.
  • Operating profit increased 20% to $105.04 million.
  • The operating margin expanded 120 basis points to 17.9%.

Year-to-date, Dollarama’s earnings per share have increased 26.1% to $1.45, its revenue has increased 12.1% to $1.66 billion, and its same-store sales have increased 4.5%, all of which puts it on pace for a record-setting yearly performance.

3. Inexpensive current and forward valuations

At current levels, Dollarama’s stock trades at approximately 26.9 times fiscal 2015’s estimated earnings per share of $2.21 and approximately 23.1 times fiscal 2016’s estimated earnings per share of $2.58, both of which are inexpensive given the company’s long-term growth rate. I think the stock could consistently trade at a fair multiple of about 26, which would place shares upwards of $67 by the conclusion of fiscal 2016, representing an increase of more than 12.5% from current levels, and this does not include the additional returns from reinvested dividends.

Should you buy shares of Dollarama today?

Dollarama Inc. has been one of the best performing stocks in the market in 2014, rising more than 30%, and I think it could post a similar performance in 2015, because it is Canada’s leading dollar store chain that has plenty of room to expand, it has the support of double-digit earnings growth, and because its stock trades at inexpensive current and forward valuations. With all of this information in mind, I think Foolish investors should consider Dollarama to be one of the best long-term investment opportunities in the market today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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