While many stocks have struggled over the last year, as market conditions have rapidly shifted, one of the few companies that has continued to perform exceptionally well is Dollarama (TSX:DOL).
Higher inflation is affecting how many companies do business. For some, the rising costs are impacting their profitability. For others, inflation could potentially impact revenue, as consumers are now spending more money on essential goods and services. And then, there are companies seeing an impact on both costs and revenue.
However, because consumers continue to turn to discount retailers like Dollarama to try and offset some of the price increases of staples, it’s been one of the few stocks that has actually seen a boost in this economy, with the share price up roughly 30% since the start of 2022.
So, if you’re looking at buying Dollarama stock today, let’s look at just how high the stock could rally in 2023.
Is Dollarama stock’s growth sustainable?
The fact that Dollarama is a discount retailer makes it one of the best stocks to buy now. As we’ve seen time and again, as consumers’ incomes are impacted by the economic environment, such as a recession or surging inflation, many turn to the company to try and save cash on goods that need to be purchased. This makes Dollarama a highly defensive business.
Typically, when investors choose to buy defensive stocks, such as utilities, the increased resiliency often means that we have to compromise on growth potential.
However, as reliable as Dollarama is in these environments, it’s also one of the top growth stocks in Canada.
Over the last 10 years, its revenue has increased by 172%, and its normalized earnings per share has increased by 452%. These are truly impressive numbers and have led the stock to earn a total return of more than 690% over the last decade, a compounded annual growth rate of 23%, making it one of the top-performing stocks on the TSX.
However, often as companies grow rapidly in size, their growth potential diminishes, so it’s understandable if investors are concerned whether this rapid growth rate is actually sustainable.
In the near term, though, Dollarama has tonnes of tailwinds that are positively impacting its ability to grow. Of course, inflation remains elevated and is already allowing the stock to see substantial gains today. Plus, many expect a recession to materialize too, which should also cause many consumers to seek cheaper options for household staples that are essential to purchase.
In just the last year, sales have increased by 16.7%, the fastest rate of growth that Dollarama has ever seen in a single year. Not to mention that going forward, many analysts expect Dollarama’s sales growth to remain elevated for some time, giving the stock a tonne of potential to continue rallying.
How high could the discount retailer rally in 2023?
With analysts expecting that Dollarama will grow its sales by another 10% this year and over 8% next year, there is certainly potential that the stock could continue to rally.
These growth rates are, of course, lower than what it achieved over the last year, but at a time when many companies are struggling to grow their profitability, the stock remains an attractive option for investors looking to buy high-quality stocks that they can have confidence in.
Today, Dollarama has a forward price-to-earnings (P/E) ratio of roughly 25.7 times, which is slightly above its five-year average of 24.8 times. This makes sense, as investors will often pay a premium for the highest quality and most reliable stocks on the market.
Furthermore, looking forward, analysts have estimated that Dollarama’s normalized earnings per share this year could increase by 13.9% to $3.15 and another 14.3% to $3.60 next year.
Therefore, assuming its forward P/E ratio stays the same, by the end of the year, Dollarama could be worth more than $92.50. And even if its forward P/E ratio falls slightly back to its average of 24.8 times by the end of the year, the stock would still be worth almost $89 a share.
Therefore, if you have cash to invest today and are looking for a reliable stock that you can have confidence buying now, Dollarama stock continues to be one of the best choices that Canadian investors have.
