PriceSmart: Value for Both Shoppers and Investors

PriceSmart (NDQ:PSMT) May 23, 2009: $15.75
52-week range: $10.35 (Nov. 21, 2008) - $26.93 (Jun. 6, 2008)
Dividend = $0.25 semi-annually = 3.17% current yield

Sol Price founded the membership warehouse company Price Clubs in 1976 and sold out to Costco in 1993. He later founded PriceSmart to run a similar business model in Latin America and the Caribbean. Robert Price, Sol’s son, is now the CEO.

PriceSmart, headquartered in San Diego, owns and operates U.S.-style membership shopping warehouse clubs in Central America and the Caribbean, selling high quality merchandise at low prices to PriceSmart members. PriceSmart now operates 26 warehouse clubs in 11 countries and one U.S. territory (five in Costa Rica; four in Panama; three each in Guatemala and Trinidad, two each in Dominican Republic, El Salvador and Honduras; and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands).

The company was heavily levered and losing money in FYs 2004 – 2005 before a $50 million rights offering converted debt to equity while taking the share count from 7.75 million to 25.6 million.

Since that 2005 recapitalization the company has been booming.

Here are the per share numbers as reported by Value Line:

Fiscal years end Aug. 31.

First half sales and earnings for FY 2009 have looked even better with 6-month revenues of $640 million and EPS of $0.81 versus $541.8 million and $0.55 year-over-year. April’s same store sales were up 6.9% with total revenue growth of 8.8%.

The two earnings estimates I’ve seen for this FY average $1.46 versus last year’s $1.30 for a full year gain of 12.3% despite the recessionary world economy. That makes PSMT’s projected multiple less than 10.8x – the cheapest valuation ever for these shares.

PriceSmart’s balance sheet looks good with cash and short term investments of $29.9 million against total debt of $37.4 million (as of Feb. 28, 2009). Only $3.66 million comes due within 5-years.

Semi-annual dividends were initiated in 2007 and the rate was raised this year to $0.50 per annum giving these shares an attractive and well covered 3.17% current yield.

There have been periodic rumors that either Costco (COST) or Wal-Mart (WMT) might be interested in buying out the company to cost effectively expand their own operations into PriceSmart’s geographic area. While this might never happen, the low valuation on PSMT shares certainly presents a good starting point for negotiations if either company is, indeed, inclined to acquire it.

What would be a reasonable one-year target price for PriceSmart? A return to fifteen times approximately $1.50 in earnings would lead to a $22.50 share price or up 42.8% from today’s quote.

If you look at historical price/book value ratios since the recapitalization we get another metric to guide us.

At some point in each of the past four years PriceSmart shares have commanded at least 2.27x book value. With end of February Book Value at $9.48 (and growing) it doesn’t seem a stretch to see 2.2 times the likely $10 per share year-end book value. That would justify a $22.00 share price in the next 12 months or 39.7% above the current level.

Add in the 3.17% yield and the total return potential looks quite tempting.

Summary

PriceSmart has continued to post higher sales and earnings despite the slow economic conditions. They have a solid balance sheet and a generous, sustainable yield that exceeds the rates on bank CDs and most treasury notes. There is some speculative chance for a takeover.

Even a partial rebound towards historical P/E and P/BV ratios could drive the share price up by 40% or more. The best value in the stores may be the shares of the company.

Disclosure: Author is long shares of PriceSmart.

Comments

[SD Surfer:]

Nice article about a nice company who also does tons of nice work and charitable giving for San Diego and the countries which they serve.

May 27 04:53 PM

[burque:]

Thank you for an introduction to an interesting company. A perusal of their most recent annual reports, though, makes it hard to guess their growth strategy. They've pulled back from some poorly performing Asian assets, any sense if they plan to try to further saturate Central America/Caribbean or venture heavily into S. America?

May 29 07:22 PM

[Paul Price:]

PRICESMART INC (NASDAQ:PSMT) Strong Uptrend
Smart Scan Chart Analysis confirms that a strong uptrend is in place and that the market remains positive longer term. Strong Uptrend with money management stops. A triangle indicates the presence of a very strong trend that is being driven by strong forces and insiders.

Based on a pre-defined weighted trend formula for chart analysis, PSMT scored +100 on a scale from -100 (strong downtrend) to +100 (strong uptrend):


+10 Last Hour Close Above 5 Hour Moving Average
+15 New 3 Day High on Tuesday
+20 Last Price Above 20 Day Moving Average
+25 New 3 Week High, Week Ending June 6th
+30 New 3 Month High in January

+100 Total Score

Jun 02 10:06 PM