by Lawrence Meyers | April 15, 2014 2:43 pm
A little-known fact about PriceSmart (PSMT): It actually merged with Costco (COST) in 1993, only to be spun back off in 1994. But I enjoy the connection, because I very much think of PSMT as the Latin American Costco.
But is PSMT stock as attractive as Costco? Well…
All told, PSMT stock rises and falls based on the fate of the company’s 32 stores: six in Costa Rica; four each in Panama and Trinidad; three each in Guatemala, the Dominican Republic, and Colombia; two each in El Salvador and Honduras; and 1 each in Aruba, Barbados, Jamaica, Nicaragua, and the U.S. Virgin Islands. (PriceSmart also has expansion aspirations in other parts of Latin America.)
Everyone has their view about which emerging market will emerge the hardest. Various friends of mine in the investment and international communities view Latin America as the next big growth region. They are particularly excited about Costa Rica, Colombia and Brazil. I happen to agree, so any opportunity to place capital in these regions — especially with an established brand — is something I pay attention to.
PriceSmart recently reported earnings, and the market slammed PSMT stock — shares were off by about 11% and have bounced back only a bit since then. I’ll agree that PriceSmart was too expensive to buy into at the time, but PSMT’s battering appeared overdone … so, now’s a good time to revisit that thought.
For as bad as PSMT stock got beat up, though, the earnings report was actually pretty good.
Net income rose to $28.3 million from $24.9 million last year, a 14% increase. That translated into an 8-cent-per-share analyst beat. Revenue increased 11% to $674 million, yet it fell short of analyst expectations of $678.91 million. Of course, I think it’s crazy that a $4.91 million shortfall — less than 1% — would be considered such a disaster.
Gross margins decreased 19 basis points to 14.5%, but I hardly consider that to be the end of the world, either. But hey, if the market wants to discount the stock irrationally, I’m fine with that.
Let’s check the overall financial picture to see if there’s value here.
PriceSmart’s balance sheet looks pretty good, with about $79 million in cash and only $60 million in debt. The debt is comparably expensive, costing $5.2 million in interest annually, or about 9%. Yet that $5.2 million in the face of more than $100 million in annual net income for PSMT does not give me any reason for concern. Free cash flow has continually improved over the years, too, so there’s no concern there.
Plenty of big-name mutual funds hold PSMT stock, so there’s faith from the institutional community. I also love that insider holdings are at 37.5%. It means management’s interests are strongly aligned with shareholders.
I actually have very little problem with PSMT stock … until we actually hit the area that concerned me even before PriceSmart’s tumble: valuation.
PSMT stock is sitting around $93. FY14’s projected earnings are $3.23 per share, giving PriceSmart a P/E ratio of 29. Long-term growth rate projections are at 17%, so on this basis, it’s still overvalued.
The cash position isn’t large enough to warrant a premium, nor is the FCF situation so overtly amazing that it earns a premium there, either.
Thus, despite now being well off its 52-week high of $126 — by a whopping 30% — PriceSmart still seems expensive to this value-driven investor.
I’m willing to pay for growth. I might even give it a 20x valuation on FY15’s earnings because I like it so much.
But even then, PSMT stock would have to hit $70 to get me interested.
Back to the drawing board.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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