Dollarama Inc. (TSX:DOL), the largest owner and operator of dollar stores in Canada, has been one of the market’s top performing stocks in 2015, rising over 34%, and I think it will continue to be in both the short and long term for five primary reasons, so I have placed it at the top of my Christmas list.
Let’s take a closer look at these five reasons, so you can determine if it should be at the top of your Christmas list as well or if you should take it one step further and establish a position today.
1. Its strong financial performance could support a higher share price
On December 9, Dollarama announced very strong earnings results for its 13- and 39-week periods ended on November 1, 2015. Here’s a summary of 12 of the most notable statistics from the first 39 weeks of fiscal 2016 compared with the same period in fiscal 2015:
- Net earnings increased 33.4% to $260.33 million
- Diluted net earnings per common share increased 38.6% to $2.01
- Revenue increased 13.4% to $1.88 billion
- Comparable-store sales increased 7.1%
- Gross profit increased 20% to $720.33 million
- Gross margin improved 210 basis points to 38.2%
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 31.6% to $407.59 million
- EBITDA margin improved 300 basis points to 21.6%
- Operating profit increased 32.2% to $372.45 million
- Operating margin improved 280 basis points to 19.8%
- Opened 77 net new stores, bringing its total count to 1,005
- Weighted-average number of diluted common shares outstanding decreased 3.8% to 129.53 million
2. Its stock trades at inexpensive forward valuations
At today’s levels, Dollarama’s stock trades at just 27.4 times fiscal 2016’s estimated earnings per share of $2.92 and only 24.7 times fiscal 2017’s estimated earnings per share of $3.24, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 42.1 and the industry average multiple of 28.5.
With its five-year average price-to-earnings multiple and its estimated 18.5% long-term earnings growth rate in mind, I think Dollarama’s stock could consistently command a fair multiple of about 35, which would place its shares upwards of $113 by the conclusion of fiscal 2017, representing upside of more than 41% from today’s levels.
3. It has massive expansion potential
As of November 1, 2015, Dollarama had a total store count of 1,005, an increase of 77 from the end of the year-ago period and an increase of 50 year-to-date. I think the company could easily add at least another 50 stores per year over the next 10 years, bringing its count to over 1,500 by 2025, and I think it could accomplish this without ever running into issues related to market densification.
4. It has been repurchasing its shares
Dollarama has been actively repurchasing its common stock over the last few years, including 7.44 million shares for a total cost of approximately $293.2 million in fiscal 2014, 9.27 million shares for a total cost of approximately $436.22 million in fiscal 2015, and 4.19 million shares for a total cost of approximately $335.2 million in the first 39 weeks of fiscal 2016.
Also, in its first-quarter earnings report on June 10, the company announced the renewal of its normal course-issuer bid, allowing it to repurchase up to 4.5 million shares of its common stock, or approximately 3.5% of its total public float, beginning on June 17, 2015 and ending on June 16, 2016. Then on December 9, it announced an amendment to this bid, bringing the total number of shares that it can repurchase up to 6.43 million, representing approximately 5% of its total public float.
This repurchase activity will boost Dollarama’s earnings-per-share growth potential going forward, while also making its remaining shares more valuable than ever.
5. It is a dividend-growth play
Dollarama pays a quarterly dividend of $0.09 per share, or $0.36 per share annually, giving its stock a 0.45% yield at today’s levels. This tiny yield may not seem like much at first, but it is very important to note that the company has raised its dividend for four consecutive years, and its very strong financial performance could allow this streak to continue for the foreseeable future.
Does Dollarama belong on your Christmas list or in your portfolio?
Dollarama represents one of the best long-term investment opportunities in the market today, so all Foolish investors should add it to their Christmas lists and strongly consider making it a core holding before the end of the year.
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Fool contributor Joseph Solitro has no position in any stocks mentioned.