Dollarama is not only a retailer that performs well when consumers are under pressure. It’s also a company that continues to grow even when the economy is strong. That sets it apart from most other defensive stocks. It doesn’t rely on one type of environment to succeed. Instead, it benefits from scale, brand recognition and a value proposition that keeps customers coming back year after year.
That’s also why Dollarama has built such an impressive long-term track record. The company has consistently increased sales, expanded margins and opened new locations without taking unnecessary risks.
The only thing keeping Dollarama from being a no-brainer for any investor is its valuation. Dollarama has consistently traded at a steep growth premium, and today that premium is essentially as high as it has ever been.
And while it’s natural for investors to hesitate when a stock is trading near an all-time high, Dollarama continues to perform operationally at a level that justifies this premium.
So if you’re considering adding Dollarama to your portfolio, this is where the stock could be in three years.
What could drive Dollarama’s growth over the next three years?
While Dollarama has been one of the most impressive and consistent growth stocks over the past decade, it still has room to grow domestically.
The company continues to open new stores each year and same-store sales growth has remained strong thanks to steady demand and pricing discipline. Even in a mature market, Dollarama has shown it can increase traffic and shopping cart size without sacrificing margins.
However, in addition to the domestic growth potential, Dollarama also has many opportunities to expand its activities internationally.
The investment in the Latin American discount retailer, Dollar Cityhas grown rapidly and now Dollarama has expanded its presence to Australia.
Furthermore, the fact that Dollarama is not only expanding internationally, but also using its expertise to improve the operations of these companies, creates a lot of potential in the long term.
Where could Dollarama stock be in three years?
As Dollarama continues to expand its operations both in Canada and internationally, the stock still has plenty of potential to move higher in both the short and long term. That said, predicting exactly where the stock price will land is not as easy as it seems.
Even as Dollarama continues to operate and grow its business, broader market conditions and the stock’s valuation will still play a role in how it trades.
Over the past three years, Dollarama has traded at about 42 times forward earnings and about 25 times low. Today it’s at the high end of that range, at about 40.5 times forward earnings.
Three years from now, analysts predict expected earnings of about $6.50 to $7 per share, compared to about $4.67 today. That implies earnings growth of about 13% per year, which is in line with Dollarama’s historical performance.
So if the stock were to maintain a similar valuation multiple as today, around 40 times, the share price in three years would be somewhere between $260 and $280.
And while that’s a compelling return in just three years, there is a risk for investors that the valuation premium will decline or earnings growth will slow. Those are real risks, especially considering how expensive the stocks already are. At the same time, however, Dollarama has been proving for years that it can function in almost any environment.
In fact, there are very few economic conditions that really derail Dollarama’s business. In fact, tougher conditions often work in his favor.
So while Dollarama is expensive and has valuation risk, given its reliability and long-term growth potential, it remains one of the highest quality stocks to buy and hold for the long term.
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