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Dollarama still a good buy for investors: analyst

Almost half – 48 per cent – of sales at Dollarama in the second quarter were from products sold for more than $1, chief operating officer Stéphane Gonthier told analysts.

Peter Power/The Globe and Mail/Peter Power/The Globe and Mail

Dollarama Inc. stock may not seem such a bargain after its 32 per cent rise so far this year, but Canaccord Genuity analyst Derek Dley contends it still provides investors with good bang for their buck.

The reason is pretty simple: stellar, consistent revenue and earnings growth over the past 10 years and a dominant market share in Canada. Its store count of 680 is more than its next five largest competitors combined. And it's still growing, planning to add 50 stores a year in the near future.

Mr. Dley initiated coverage today with a "buy" rating and $44 price target. That may seem expensive, considering that's 18.2 times his fiscal 2013 earnings per share estimate of $2.42, above the 16.8 price-to-earnings average for U.S. peers for the coming fiscal year.

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But he thinks it's justified.

"We believe the company's store network expansion opportunities, ability to manage margins in periods of rising costs, healthy same-store sales growth, robust free cash flow generation, and superior ROE supports Dollarama's premium valuation," Mr. Dley said in a research note.

While dollar stores may seem ubiquitous in the Canadian retailing scene these days, he notes the market is still notably under-saturated compared with the United States.

Dollarama increased its revenues by 12.4 per cent year-over-year in fiscal 2011 to $1.4-billion. Also impressive, he notes, is that its compound annual growth rate in revenue since 2002 stands at 16 per cent.

Related: Dollar stores attract investors seeking growth in tough times

Related: Dollar stores are putting up explosive growth

Related: Dollarama turns up heat on Wal-Mart

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Canaccord Genuity analyst Nicholas Campbell upgraded Timmins Gold Corp. to "hold" from "sell" after a more than 30 per cent slide in its shares since mid-October. "While we remain concerned with the cost increases at the (San Francisco) mine and the relatively low cash position of the company, we believe that the current share price of TMM now largely reflects these concerns," he commented.

Upside: Mr. Campbell maintained a $2.10 price target.

Related: Timmins Gold quarterly revenue almost doubles

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Investors concerned about the economic environment should consider regulated utility stocks such as Valener Inc. , which has just secured financing for a new wind project in Quebec, said RBC Dominion Securities Inc. analyst Robert Kwan. "Valener has an attractive yield at 6.5 per cent, which we view as sustainable based on cash flow, coupled with a defensive regulated utility business," he said.

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Upside: Mr. Kwan upgraded the stock to "sector perform" from "underperform" and maintained a price target of $16.

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Nuance Communications Inc. is operating well across its business segments and trends are positive for the leading provider of speech technology solutions, said Brigantine Advisors analyst Barbara Coffey. She raised her revenue expectations for the December quarter and for the fiscal year after the company reported slightly better-than-expected quarterly earnings.

Downside: Ms. Coffey raised her price target by $5 to $29 and reiterated her "buy" rating.

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Raymond James Ltd. analyst Kristopher Zack has cut his 2012 production estimates for oil and gas company NAL Energy Corp. , while boosting operating cost forecasts. He cited lower growth expectations and the non-recurring impact of hedges in 2012.

Downside: Mr. Zack downgraded the stock to "market perform" from "outperform" while trimming his price target by $2 to $9.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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