For years Dollarama (TSX:DOL) has been one of the most impressive stocks on the TSX. Not only has it consistently grown its operations and created impressive value for shareholders as the economy has expanded, but it has arguably performed even better as the economy has worsened and its discounted retail business sees a natural boost in demand.
Because of its impressive long-term growth potential, coupled with its defensive operations, Dollarama is easily one of the best stocks to buy and hold for the long haul.
For example, this year, as both the economy and market have struggled while facing more significant headwinds, Dollarama stock has earned investors a return of approximately 19.5%.
Furthermore, in the last five years, it has earned investors a total return of more than 200%, or a compounded annual growth rate (CAGR) of 24.9%. And in the last 10 years, it’s up an unbelievable 579%, growing at a CAGR of 21.1%. For comparison, the TSX has earned investors a return of just 54.7% over the last decade.
This just goes to show how impressive, but more importantly, how consistent its growth has been over the years. However, with interest rates now appearing to peak and many expecting a recovery in 2024, how will Dollarama stock perform, and can it hit $120 a share next year?
Why has the discount retailer grown so quickly over the years?
Dollarama’s rapid and lengthy timeline of growth is certainly impressive. However, it’s not necessarily surprising.
For one, there’s never a shortage of consumers looking to buy discounted goods, especially essential goods and staples. So even though recessions and economic downturns don’t last forever, they can create habits in consumers that are hard to break. This is what has led to such significant and consistent growth over the years.
Furthermore, in addition to the same-store sales growth and new stores Dollarama is opening thanks to the consistently increasing demand, it has also done an impressive job merchandising over the years.
This includes strategic price increases and new product offerings that not only continue to keep its margins strong but also contribute to shoppers buying more items per store visit.
This strategy has directly translated into financial growth, with sales up 172% in the last decade from $1.8 billion to more than $5 billion last year. Furthermore, its adjusted earnings per share (EPS) has jumped from $0.50 to $2.76 over that stretch and is expected to jump another 25% this year to $3.44
How is Dollarama stock valued?
As with all stocks, Dollarama can be valued using a variety of different methods. However, Dollarama’s valuation primarily hinges on its Price-to-Earnings (P/E) ratio.
It’s also worth noting that Dollarama is currently in its 2024 fiscal year, which ends in January. So the focus is shifting towards the 2025 and 2026 fiscal years.
Right now, analysts expect Dollarama stock to report normalized EPS of $3.87 for fiscal 2025. It’s also worth noting that in the last three years, Dollarama’s P/E ratio has fluctuated between 22 and 30 times.
Therefore, assuming Dollarama achieves the growth analysts are expecting, its share price could range from $85 to $116 in the near term.
However, the market typically values stocks based on forward estimates, so by the end of next year, attention will likely shift to the fiscal 2026 outlook.
Therefore, with analysts expecting a 12% increase in EPS to $4.34 for its fiscal 2026 year, Dollarama’s stock could be valued between $95 and $130 by the end of 2024, considering its historical P/E range.
The bottom line
Predicting where Dollarama stock will trade next year is still difficult, considering we don’t know how well it will perform and whether it will hit, miss, or possibly even exceed its expectations for growth.
In addition, it’s difficult to predict the state of the market and forward P/E ratio that the market will value Dollarama stock at.
What we do know, though, is that for years it is consistently grown its operations and profitability at an exceptional pace, and over the long run, is one of the best stocks to buy considering both its growth potential and defensive operations.
So if you’re considering Dollarama stock today, it’s certainly one of the top stocks to buy in Canada and a worthwhile long-term investment.
