PriceSmart: Strong Returns for Latin America's Costco

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Includes: COST, PSMT, WMT
by: Paul Price
PriceSmart (NASDAQ:PSMT), Inc. engages in the ownership and operation of U.S-style membership shopping warehouse clubs in Central America and the Caribbean. These warehouse clubs sell basic consumer goods to individuals and businesses. The clubs offer a selection of products, including perishable foods and basic consumer items. They also provide ancillary services, which include food services, bakery, tire centers, and photo centers. As of July 7, PriceSmart operated in 26 warehouse clubs in 11 countries and one U.S. territory, including four in Panama; five in Costa Rica; three each in Guatemala and Trinidad; two each in the Dominican Republic, El Salvador, and Honduras; and one each in Aruba, Barbados, Jamaica, Nicaragua, and the United States Virgin Islands.
When Sol Price sold his U.S.–based PriceClubs to Costco (NASDAQ:COST), he was no longer allowed to compete with COST here at home. PriceSmart was developed to recreate the same experience in Central America and the Caribbean. Sol’s son Robert Price is now CEO and Chairman of the very successful discount chain. [Sol died this week at age 93].
Business has been very good despite the poor economic climate. Recently announced earnings for FY 2009 (ended August 31) came in at $1.45 /share versus $1.30 in FY 2008. Here are PSMT’s per share (fully diluted) numbers as reported in their annual report.
FY*
Sales
C/F
EPS
Div.
B/V
Avg. P/E
Range
2005
24.02
d.0.52
d. 3.15
Nil
7.75
NMN
6.11 – 8.70
2006
25.24
0.61
0.30
Nil
8.10
31.2x
7.55 – 20.64
2007
30.13
0.88
0.44
0.32
8.36
32.6x
13.31 – 33.67
2008
37.65
1.67
1.30
0.32
9.27
20.3x
10.35 – 31.89
2009
42.89
1.85
1.45
0.50
10.27
11.7x
13.76 – 21.50
* FYs end Aug, 31st
Semi-annual dividends were initiated in 2007 at a $0.32 yearly rate that was raised to $0.50 per year in 2009. The next dividend announcement should come by next month with another hike likely. At the present rate, the current yield is already a decent 2.51% at yesterday’s close of $19.94 /share.
Zacks sees FY 2010 and 2011 estimates of $1.49 and $1.73, respectively, making the multiple about 13.4x this year’s and approximately 11.5x next year’s expectations. Compare those P/Es with Costco’s at 20.6x this year’s and 18.6x next year’s estimates. Also note the historical P/E levels for PSMT itself from the chart shown above.
A return to a still lower-than-normal 16 multiple would bring PSMT shares back to $23.84 by next summer and to a goal of $27.68 by the end of FY 2011. Those targets doesn’t seem out of line considering the excellent sales, earnings, dividend and book value growth since 2005. Note that PSMT shares hit peak trades of $31.89 and $33.67 in 2007 and 2008 when fundamentals were not as strong as they are today.
They have been occasional rumors that Wal-Mart (NYSE:WMT) may consider a buyout of the whole company as a cheap and quick way to expand their Latin American operations.
Summary:
PriceSmart is a well-run discount retailer that is thriving during a major economic downturn. The valuation looks compelling and the yield is better than what’s now available on money markets and 1 – 2 year CDs.
Buyers today will qualify for the next semi-annual dividend (expected in January) and position themselves for total returns that look quite good. The takeover possibility, while unpredictable, adds a potential bonus to the expected projections.
Disclosure: Author is long PSMT shares.