A Smart Play on the Latin American Consumer
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve written about my desire to add some more exposure to Latin America (LatAm) to my portfolio. I also think that going with a tried and true business model is a very smart way to take some risk out of the equation. The membership based warehouse concept made popular by Costco (NASDAQ: COST) is one such business model that should translate well south of the border. Costco spinoff PriceSmart (NASDAQ: PSMT) is the logical choice to profit from the growth of the middle class in LatAm.
For a bit of a history on PriceSmart the first place to start is with their founders. Sol and Robert Price began in 1976 by founding Price Club, which virtually pioneered the warehouse club model and they later merged it into Costco. After a brief stay at Costco they spun off Price Enterprises to focus on growing the warehouse concept in LatAm by forming PriceSmart. Today PriceSmart has 29 stores in 12 countries and one US territory. While they haven’t strayed too far from the Costco model there are a few difference: they operate smaller stores, have a lower membership fee and their merchandise is tailored to local preferences.
PriceSmart is just scratching the surface of their growth opportunities with just one store in South America (Colombia just opened). Before them just a little further south is the burgeoning Brazilian market and their population of nearly 200 million. Their other 28 stores throughout Central America and the Caribbean have garnered them just over 800,000 members; to put it into perspective, Costco has 65 million members. In the US Costco has over 400 stores to serve our population of 300 million so as you can see the growth potential for PriceSmart is very exciting. They are also very good operators with retention rate of 88%, which is in line with Costco at 89%.
They do have some competition as they grow in South America as Wal-Mart (NYSE: WMT) for example has a growing presence in several markets with both Wal-Mart stores and Sam’s Clubs. PriceSmart’s slow and steady growth plan has worked well for them so far, but it has put them behind when compared to Wal-Mart, as they’ve already built 24 Sam’s Clubs in Brazil. Sam’s and Costco have had no problem coexisting here in the states and I don’t see any reason why they can’t do the same in South America’s largest market either.
When comparing PriceSmart to Costco the metrics are almost all in the favor of PriceSmart. They have higher gross and net margins while also having much higher revenue growth. At a market capitalization of just $2.4 billion and having generated about $75 million in operating profit that gives them an earnings multiple of just over 35 times. Analysts estimate they’ll grow earnings by 17% this year and 21% next year and they have a solid balance sheet with just $10 million in net debt. They also pay a small dividend of just under 1%. Overall, their financials are solid and given their self-funded pace of growth should continue to improve over time.
I have about two-thirds of what I’d consider a full position in PriceSmart. I don’t have any problem adding to and even increasing my position here, however, I am also thinking of adding another LatAm-focused company with a very similar growth profile. PriceSmart is priced for growth but over time that growth should come in spades as they have decades of steady growth ahead of them as they continue to tap the fast growing Latin American markets.
Motley Fool newsletter services recommend Costco Wholesale, PriceSmart, and Wal-Mart Stores. The Motley Fool owns shares of Costco Wholesale, and Wal-Mart Stores. latimerburned owns shares of PriceSmart and has a diagonal call on Wal-Mart. 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.