PriceSmart Will Be Perfect Once It’s Cheaper

by Lawrence Meyers | April 19, 2013 6:30 am

Will PriceSmart (NASDAQ:PSMT[1]), a Costco (NASDAQ:COST[2]) spinoff, become the Latin American version of its former parent?

The international business community has been hailing Latin America as the rising sun of investment — especially Costa Rica and Colombia.

Costa Rica is adored for its libertarian, business-friendly government. IBM (NYSE:IBM[3]) and Infosys (NYSE:INFY[4]) are just two of the companies that are expanding their presence in the country. In fact, the national currency has been soaring as more money floods the country — enough that the government might have to put on the brakes.

Over in Colombia, investment also has been pouring in ever since the drug cartels got the boot. A college friend of mine is launching a massive boating business there, and he’s been traveling the country soliciting orders. He’s told me that he needs tons of financing to meet the overwhelming demand, which gives you a taste of how quickly businesses can take off.

As for PriceSmart: The company has 30 warehouses, including five in Costa Rica and one in Colombia, and it has plans to open at least three more in the near future.

PSMT just reported very impressive earnings for Q2. Revenue increased 10% to $607 million, while earnings came in at 82 cents per share — 22% higher than last year’s, beating estimates by 6 cents. Margins are doing well, with gross margin flat at 15.9%, and operating margins increased a solid 50 basis points to 6%. That income trickled down to net margin, which increased 40 basis points to 4.1%.

Like Costco, PriceSmart loves its high-margin membership income. Membership increased by 30%, up to $8.3 million, with a 12% increase in active accounts. (Active accounts now total more than 1 million.) The membership renewal rate was 85%, suggesting that most customers are finding plenty of value at the store.

The company also has moved into e-commerce, and has begun shipping orders out of Miami. Given the success of e-commerce in the U.S., this kind of service should only enhance the overall business.

PriceSmart currently sits on $101 million in cash, up from $84 million last year. Through the first half of this fiscal year, the company generated $61 million in cash, while spending $39 million in land acquisition, fixtures and building construction. It also paid $9 million in dividends.

The market seems to love PriceSmart’s prospects as much as I do. But that doesn’t make the stock an automatic buy. Even if we are generous and give PSMT a 24x multiple to reflect this year’s earnings growth, that puts fair value at $67. Long-term growth is pegged at 18%, though, so with the stock at $84, you’d be vastly overpaying at this point.

But as I said, I love this story. This is exactly the kind of stock I’m putting high up on my watchlist in the event of a market meltdown.

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

  1. PSMT:
  2. COST:
  3. IBM:
  4. INFY:

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