I’m having a love-hate relationship with Latin America economies.
On the one hand, I hear anecdotal evidence from friends who do business in Central and South America that these are the next centers of growth.
Colombia, for example, is poised to explode now that the cartels have been driven out. 5-star hotels are popping up everywhere. Commerce is robust. I’m told things are popping in Costa Rica. Another friend says Brazil is sluggish right now but should be booming.
On the other hand … they’re not there yet.
That’s why I’m intrigued by PriceSmart (PSMT), which essentially is the Latin American Costco (COST). (In fact, Price Club was formed in 1976 and merged with Costco in 1993, only to be spun off as PriceSmart the next year.)
However, while I say “intrigued,” my interest isn’t bullish. It’s a great business in theory, and it’s similar to a good company (Costco) … but it just isn’t there yet.
PriceSmart: Earnings and Outlook
PriceSmart has a broad base that it is slowly expanding. PriceSmart has six stores each in Colombia and Costa Rica; four each in Trinidad & Tobago and Panama; three each in Honduras, Guatemala and the Dominican Republic; two in El Salvador; and one each in Panama, Aruba, Barbados, Jamaica and the U.S. Virgin Islands.
And again, PriceSmart is a small version of Costco. But my question is whether it will become gigantic one day … because right now, things are moving very slowly.
For Q3, warehouse sales increased 13% year-over-year to $675 million, while total revenues across all of PSMT was up 13% to $697 million. However, PSMT had three more stores in this quarter compared to last year.
Operating income wasn’t all that impressive, at $33.5 million compared to $31.2 million last year. The bottom line? Also meh. $21.2 million, or 70 cents per share — flat on a per-share basis with last year, but $100,000 less overall.
Things don’t look any better when you look at the performance over the past nine months.
Warehouse sales increased 11% to $2.04 billion, up from $1.84 billion. Total revenues were up 11% to $2.1 billion from $1.90 billion. Operating income increased modestly to $111.5 million from $103 million, while net income of $67 million ($2.20 per share) came in below last year’s $71 million ($2.34 per share).
We always want to look at comparable warehouse sales, so we don’t get misled by those three extra stores. Comps did increase for the first nine months, but only by 2.6%, which is nothing special.
At least the cash situation looks good, with $160 million to $6.3 million in debt, so that comes out to about $5 per share in cash.
Why Is PSMT Struggling?
There might be two factors at play.
The first is the fact GDP growth just isn’t impressive in Latin America. For instance, it’s 2.8% in Colombia and 2.7% in Costa Rica, which is decent but not great, and certainly not explosive. Unemployment in those two countries is 8.9% and 10.1%, respectively.
The other countries are not booming, either. So I suspect that’s part of the problem.
The other problem, to be frank, may be a cultural issue. Americans certainly love the big wholesale clubs, but it’s possible that Hispanics are not as keen on it. In many countries, there are street markets everywhere, where one can buy smaller, high-quality products at a cheap price.
It may be that the warehouse clubs are seen as something more for upper-middle and upper classes to visit.
But for whatever reason, PSMT has been bid up dangerously high.
PriceSmart’s earnings are on track to recede for the full fiscal year, and while next year’s expectations are rosy — Wall Street sees 18% earnings growth — PSMT is a quarterly EPS disappointment, having missed the mark for four straight quarters.
Yet PSMT is up about 4% today, giving it roughly 25% gains from its mid-March lows.
PriceSmart now trades at $95 per share, which puts it at 33 times trailing earnings and 27 times next year’s earnings. That’s a dangerous combination for a company with lackluster growth.
I would stay far away from PSMT despite Wall Street’s post-earnings optimism.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
