PriceSmart Earnings Preview: Fantastic Growth, but Will It Continue?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
PriceSmart (NASDAQ: PSMT) reports earnings on Wednesday, Jan. 9, and there are two important points for investors to think about in terms of this company. First, why should I invest in PriceSmart, as opposed to one of its bigger, more established competitors such as Wal-Mart (NYSE: WMT), Target (NYSE: TGT), or Costco (NASDAQ: COST)? Secondly, what should we watch for in the earnings report that will help decide whether or not PriceSmart is a wise investment at this time?
First, a little background on the company. PriceSmart is headquartered in San Diego, California, but the company owns and operates membership shopping warehouse clubs in Latin America and the Caribbean (think Sam’s Club or BJ’s), so those investors who are not comfortable with the economies of these regions should probably choose one of the U.S. big box retailers mentioned above. The company currently operates 30 warehouse clubs in 12 countries and 1 U.S. territory.
PriceSmart trades at 33.55 times TTM earnings, a significant premium to the industry average. For comparison, Wal-Mart’s EPS multiple is 14.11, Target’s 13.19, and even the highly-valued Costco trades at 24.68 times TTM earnings. PriceSmart also is 4th place in the dividend category, yielding only 0.80%, compared with 2.32%, 2.42%, and 1.11% for Wal-Mart, Target, and Costco, respectively.
What PriceSmart has that these other three do not is growth. Costco is the only one of the big three that is projected to have high growth over the next several years, but it pales in comparison to PriceSmart. PriceSmart earned $2.24 per share in fiscal year 2012, which ended in August. They are expected to earn $2.74 and $3.26 in fiscal years 2013 and 2014, a year over year growth rate of 22.3% and 19.0%, respectively. I feel this type of growth justifies the high multiples. In fact, the company has steadily grown its earnings per share every single year for the past decade, from a loss of $4.67 per share in 2003, to the current earnings levels mentioned above. The chart below illustrates the earnings growth throughout the years.
So what should you listen for in the conference call? Essentially, you want to hear solid evidence that the company’s growth is either continuing or accelerating. For example, in the last conference call (which was extremely positive and upbeat), the company announced that for the first time, in FY 2012, annual sales topped $2 billion, only four years after the company hit the $1 billion milestone. Another thing to listen for is any discussion of growth in membership. As of the end of FY 2012, the company has 965,000 membership accounts, up 18% from FY 2011.
The company also discussed observations from the beginning of FY 2013, which they most likely will reiterate and expand on this time. The company has just opened its second warehouse in Columbia, and investors should pay attention to how things are going in that store. Also, the company has planned to open a 3rd Columbia location in the spring. Listen to verify that is still on schedule.
A major development is the company’s new Platinum Membership, which it launched on Nov. 1. This provides members with added benefits over basic memberships, similar to Costco’s Executive Membership. Look for any indication on whether that program is looking like a success or failure.
In conclusion, PriceSmart looks like a very solid company, with a spectacular sustained growth rate. If the earnings report on Wednesday gives indications that this will continue, the company may indeed be worth a look.
KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale and PriceSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!