Dollarama (TSX:DOL) stock has been one of Canada’s best-performing assets ever since the 2020 bear market. That year, the stock touched a low of $36.82. Today it’s worth $106.15, which means that it has delivered a 188% capital gain. The stock also pays a dividend, so its total return has been even higher than what the stock price implies.
The question is, is Dollarama still a good buy, or is it too late to invest in it? When a stock rallies close to 200% in just a few short years, it’s hard not to get the feeling it’s run too hot. Dollarama has grown quite a bit as a company, but its stock price has appreciated even more. Therefore, it is not as good of a buy today as it was at its COVID lows. However, it may still be a decent buy; we need to look at the company’s performance and the stock’s valuation to determine whether that is the case.
Recent performance
Dollarama has been performing well recently. In the last 12 months, it has delivered the following:
- $5.7 billion in revenue, up 18.7%
- $1.35 billion in operating income, up 28.5%
- $948 million in net income, up 24.65%
- $3.32 in diluted earnings per share (EPS), up 28.5%
On the whole, these were pretty good results. We saw high growth and reasonably good profit margins — retailers don’t always have the highest margins, so DOL’s profitability really stands out. Additionally, several of the quarterly earnings releases that comprised these 12-month results were better than what analysts had been expecting. Based on earnings results and revisions, Dollarama looks like a good company.
Will the good results continue into the future? It’s hard to say, but I’m inclined to think that they will. Dollarama is the undisputed champion of dollar stores in Canada. It has no meaningful Canadian competitors with similar scale, and the U.S. dollar store giants have not had a lot of success here. When a company has a dominant market position in a growing market, it tends to enjoy even better growth than that of the market as a whole. There will always be a market for cheap groceries and trinkets, so DOL will probably continue growing for the foreseeable future.
Valuation
It’s one thing to say that a business is a good one, but quite another to say that its stock is a buy. If a great company’s stock is overvalued, it’s not a good buy. How does Dollarama stack up when it comes to valuation? It’s pretty mixed. At today’s prices, it trades at the following:
- 32 times earnings
- 5.3 times sales
- 20 times operating cash flow
- 91.86 times book value
This is a fairly steep valuation. It is not outrageously steep but certainly no bargain. Personally, I am not interested in investing in DOL at today’s prices. That’s not to say that those who do buy Dollarama today will fare poorly. If the growth holds up, then the stock will probably deliver even more gains. But DOL just isn’t the bargain it was a few years ago.
