Dollarama (TSX:DOL) has been a true millionaire-maker stock. Since 2009, investors have seen their shares skyrocket by more than 1,500%. There was only a single blip in the stock’s rise. Earlier this year, when the stock fell by 40%, I called the drop “an ideal buying opportunity.” Since then, shares are up more than 50%.
Shares have rebounded, but the market is still underestimating the company’s potential. In fact, shares could have more than 100% in long-term upside. How quickly might the stock double? Let’s find out.
The story has changed
Here’s the most important part: history isn’t going to repeat itself. The stock can still double, but the factors driving that upside will be different. Here’s why: Dollarama has already maxed out its market. Today, it has more than 1,200 stores, which cover nearly every major metropolitan area in Canada.
With only 37 million people, there is only so much growth runway Canada can provide. Looking at the numbers, it seems like Dollarama’s high-growth days are over — at least in Canada. Over the last five years, EPS has grown by 22.8% annually. Over the last three years, that annual growth rate has slowed to just 16.8%. Last year, EPS grew by just 8.6%. That’s still impressive, especially considering those figures factor in share dilution, but growth is clearly trending downward.
But don’t worry — Dollarama shares will continue to skyrocket if it can execute its new growth opportunity.
Going international
In 2013, Dollarama quietly made a deal to acquire an option to buy a 50.1% interest in Dollar City, which operates stores throughout Latin America, including El Salvador, Guatemala, and Columbia. This July, Dollarama exercised the option for roughly US$80 million.
Dollarama’s CEO was excited about the prospects. “After six years of due diligence review and on-the-ground experience in Latin America, we believe that now is the right time to exercise our option to acquire this interest, and that Dollarcity is the right vehicle to capture the growth potential we see in our chosen markets,” he commented.
This deal alone could help sustain Dollarama’s double-digit growth rate for a decade or more. Last year, Dollar City had just 100 stores. Today, it has more than 180. By 2029, it wants to build more than 600. Now armed with Dollarama’s expertise, that growth vision has become much more likely.
And to be sure, Dollarama still has room to grow domestically. Analysts still expect double-digit earnings growth over the next three to five years, largely based off Canadian opportunities. So, the international upside is largely being ignored. The stock trades at a pricey 27 times forward earnings, but by next year, it will be valued at just 23 times forward earnings. If Dollarama begins to execute abroad, a valuation of 30 times trailing earnings seems appropriate. If that valuation is attained, and Dollarama grows earnings by 12% annually, shares would have 100% upside within five years. That’s not as quick of a rise as the past, but it will very likely crush the market average.
