Dollarama Inc. (TSX:DOL) has been a terrific company and stock. Since its initial public offering in 2009, it has been a six-bagger. Its stock price has appreciated 639% compared with its peers. Dollar General Corp. appreciated 228% and Dollar Tree, Inc. appreciated 294% in the same period. However, if you’re thinking of investing in Dollarama today after its price run up, you should think again.
Dollarama is trading at its highest multiple ever
This is the first time Dollarama has traded at a price-to-earnings ratio (P/E) of 31. It is true that the company has high double-digit growth potential, but investors shouldn’t pay that price for the best of companies. As Warren Buffett would say, “Price is what you pay. Value is what you get.”
Comparing peers
As mentioned before, Dollarama has the highest earnings growth potential compared with its peers. If you think about it, it is the smallest of the three, so it makes sense that it’d be able to grow at a faster rate. After all, it’s much easier to double a company that is worth $1 billion than to double a company that is worth $100 billion.
| Company | Price Per Share | Market Cap | Yield | P/E | Earnings Growth Est. | Debt/Cap |
| Dollarama | $72 | 9.3B | 0.5% | 31 | 17.4% | 43% |
| Dollar General | $74 | 22.7B | – | 20 | 14.8% | 31% |
| Dollar Tree | $78 | 16.2B | – | 24 | 11% | 29% |
Dollarama pays a dividend while its peers don’t. However, its yield is so small that any investor thinking of investing in it should expect to get most returns from stock price appreciation.
Investors buying today face potential substantial loss
Don’t get me wrong, the business is doing fine. However, the market has bid up its price. A company that normally trades at a P/E of around 20 now trades at 31.
As a result, shareholders could face sideways action for a while at best. At worst, shareholders could see price declines if it misses earnings estimates in quarterly reports. Either way, Dollarama could face potential multiple contraction back to a P/E of around 20, which would imply a price of roughly $52.
What about investors who already own the company?
Congratulations for owning a company that has been doing well. You’ll need to decide whether you should take gains or sit on possible near-term sideways or downward action. Think about your initial goal of adding Dollarama to your portfolio, and whether it’s fulfilling that purpose.
In conclusion
Now, I’m not saying that the stock will drop to the $52 level tomorrow or even next year, but the real situation is that assuming a P/E of 22, it will take the company more than two years for its earnings to catch up to today’s price.
