2020 Stocks: Dollarama’s (TSX:DOL) Share Price Could Explode!

Dollarama’s share price has the potential to drop in fiscal 2021 following disappointing Q3 2020 results. Is it a good stock for your TFSA or RRSP?

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Dollarama (TSX:DOL) operates dollar stores in Canada that sell all items for $4 or less with locations in every Canadian province. Its headquarters, distribution centre, and warehouses are located in the Montreal area.

The company signed a deal this year for a 50.1% stake of Dollarcity, which operates stores in Columbia, El Salvador, and Guatemala. Dollarcity follows a similar concept to Dollarama with products priced up to US$3.

Intrinsic price

Based on my calculations using a discounted cash flow valuation model, I determined that Dollarama has an intrinsic value of $59.61 per share. Assuming less than average industry growth, the intrinsic value would be $47.79 per share, and higher-than-average industry growth would result in an intrinsic value of $79.34 per share.

At the current share price of $45.51, I believe Dollarama is slightly undervalued. Investors looking to add a retail company to their TFSA or RRSP should consider buying shares of Dollarama. I would recommend following the stock and waiting until the end of 2020 as a correction in the market could allow investors to buy the stock at a cheaper price.

Dollarama has an enterprise value of $20.7 billion, which represents the theoretical price a buyer would pay for all of Dollarama’s outstanding shares plus its debt. One of the good things about Dollarama is its low leverage with debt at 11.6% of total capital versus equity at 88.4% of total capital.

Financial highlights

For the nine months ended November 3, 2019, the company reported a mediocre balance sheet with negative retained earnings of $563 million. This is not a good sign for investors, as it suggests the company has more years of cumulative net loss than net income. The company’s asset growth was driven by the addition of $132 million in assets from its Dollarcity stake.

Overall revenues are growing with an increase from $2.5 billion in 2018 to $2.7 billion in 2019 (+9.4%). The growth in revenues trickled down and grew the company’s bottom line from $374 million in 2018 to $385 million in 2019 (+3%)

The biggest change to the company’s statement of cash flows is the US$40 million (CAD$53 million) upfront payment for a stake in Dollarcity.

The company renewed its normal course issuer bid (NCIB) in July 2019, which allows it to repurchase and cancel up to 15,737,468 common shares (approximately 5% of outstanding shares). During the nine months ended November 3, 2019, the company repurchased and cancelled 3,086,563 common shares for cash consideration of $145 million. This is often a strategy used by management to indicate to shareholders it believes the current share price is undervalued.

Dollarama has no outstanding amounts under its credit facility, which is a good sign, as it suggests the company generates enough cash internally to manage its cash outflows.

Foolish takeaway

Investors looking to buy shares of a financially stable retail company should consider buying shares of Dollarama. 2020 will inevitably be a rough year for the markets, and I recommend investors wait for the ideal time to buy in.

Despite the company’s negative retained earnings, the company still boasts an intrinsic value of $59.61, which represents significant upside to the current share price of $45.51. Further, the company’s NCIB and no outstanding draws on its revolver should offer investors assurance of share price appreciation in the near future.

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 Chen Liu has no position in any of the stocks mentioned.

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