Is Grocer PriceSmart a Smart Buy?

by Lawrence Meyers | January 15, 2013 12:30 pm

Here’s a conundrum for readers: If a company gets acquired by Costco (NASDAQ:COST[1]) and is then spun-off by Costco, can it become the next Costco?

That’s precisely the question when it comes to PriceSmart (NASDAQ:PSMT[2]).

PriceSmart is much tinier than its elephantine step-parent, with only a wee 30 stores in 12 countries. It has the same membership fee structure — the key to business. Without those fees, Costco would be losing money and PriceSmart would be squeaking out a small profit. PriceSmart actually operates more efficiently than Costco, with double the net and gross margins.

The company’s most recent quarter was strong, too. It earned $20 million compared to $14 million the year before, which comes to an EPS of 66 cents — 4 cents better than expected. Revenue was up 12% to $535.3 million.

Membership fees accounted for about $7.7 million of that total, with an 86% renewal rate — clear evidence of strong brand loyalty. Plus, that membership income should increase because (like Costco), the company is introducing a $75 platinum membership.

On top of that, revenues have doubled and net income has quadrupled since 2007. Financially, the balance sheet looks good as well, with $88 million in cash and offset by only $71 million in debt. With free cash flow of over $30 million each of the past two years, there is room for the company to take on more debt to expand more rapidly.

What I really love, though, is that founder holds almost a third of the company’s shares. It’s always great to be aligned with management and those numbers take it to another level. Any investor can have confidence that their money is sitting right alongside management’s … literally.

The question, of course, is whether or not the stock is a buy. Analysts project long term growth at 17%, which on this fiscal year’s earnings estimate of $2.76 gives it fair value of about $46. Unfortunately, it’s trading at $77.


However, of particular note is something I’ve been hearing anecdotally about the economy in Latin America. Some friends of mine are opening a business in Latin America because they see that region as being the real place for growth in the coming decade — particularly Colombia (which has now rid itself of the cartels) and Costa Rica. PriceSmart is aiming for six stores in Costa Rica and sees tremendous opportunity for stores in Colombia. In fact, it saw a 15% YOY increase in sales in that region in the quarter.

I think it’s possible that PriceSmart becomes the Costco of Latin America. The problem is that everyone else thinks so, too. I would wait for a big pullback in the stock, probably during a big market correction, to jump in.

But then, I would jump in for sure.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.

  1. COST:
  2. PSMT:

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