Opinions
David Driscoll
Dollarama Inc.
DOL-T
BUY
Dec 27, 2024
Stock price when the opinion was issued
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It has recently come off with plans to expand in Calgary so there are cost headwinds to 2027. Valuation is quite high. It is expanding in other countries, eg. Latin America, so there is good growth ahead.
The question also included his cash position. They are fully invested but will probably take some profits in January.
The chart has been in an uptrend since early 2022, but is weakening now. It just moved below its 50-day moving average. He's cautious about DOL, though it's been a super performer in recent years. There's been institutional selling in the past month or so. Expect more downside in the coming weeks, down to its 200-day moving average. Maybe buy in January and February on pullbacks.
This is no income stock at a 0.25% dividend yield, and currently DOL shares are only $12.50 below highs of $152.97. Also, the PE of 35.88x is historically stretched. DOL traded at 30.3x to end 2022 and 31.3x three years ago. However, as Stockchaser Trevor Rose notes, Dollarama is a fine long-term hold. With volatility likely in January, pick this one up on a 5-10% pullback when its valuation normalizes.
Still adding for new clients. Key has been that it has very little competition, unlike US counterparts. You pay up for that position, at 35x forward PE, but you get 15% earnings growth going forward.
Beneficiary of cumulative effects of inflation and uncertainty in Canadian economy. Recession-resilient business model. Outpaced the TSX since its IPO in 2009.
One way to judge management is to think about capital costs versus their return on invested capital. How are they allocating capital and making over and above that, because that translates into free cashflow. FCF in 2021 was $700M; at the end of January 2024, it was $1.2B. So FCF has gone up 60%, a very good sign. Allows them to open new stores, with each new store adding revenue.
He looks for ROICs of 15% or greater. In terms of ROIC, they're making 20% on their money with cost of capital at 8.5%. That's a difference of 12%, and a whole lot of free cashflow. Lets them be flexible, continue with their growth plan, and stock price is performing as it should be.