PriceSmart's Wild Ride

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After looking at PriceSmart's (NAS: PSMT) intraday chart yesterday following its fourth quarter earnings report, one phrase immediately flew out of my mouth: "What in the hell was that?"

I can honestly say in 13 years of investing that on only a handful of occasions have I seen a company lose more than 20% of its value intraday and then manage to gain nearly every cent back. Yesterday's wild ride is nearly unparalleled as far as I'm concerned with the real oddity being that short covering was not the likely culprit for the rally, especially considering that only 7.5% of its float is currently held short.

PriceSmart's quarterly report offered some incredibly bullish data, but also peppered in some disappointment. What's say we dig a little deeper?

Buy, buy, buy
For October, PriceSmart recorded a ridiculous 19% jump in same-store sales. It also recorded a 22% jump in revenue over the same quarter last year. For the month of October, PriceSmart also announced a near 24% jump in net warehouse sales. Growth has not been an issue for PriceSmart with the warehouse retailer outpacing its peers by a long shot.

Company

5-Year Compounded Annual Revenue Growth

PriceSmart17.7%
Wal-Mart (NYS: WMT) 6%
Costco (NAS: COST) 8.1%
Target (NYS: TGT) 5.1%
Big Lots (NYS: BIG) 2.3%
99 Cents Only Stores (NYS: NDN) 6.8%

Source: Morningstar.

These figures though can be a bit misleading. For one, PriceSmart's international operations are a main driver of its growth. For example, Wal-Mart's Mexico operations have grown by 15.3% over the same period. If we just considered international growth for these six companies (where applicable) the growth difference narrows a lot. Also, it's considerably easier to grow $1.7 billion in annual revenue than it is for say Wal-Mart or Costco to grow their $422 billion and $89 billion in annual revenue. PriceSmart, at this point in its existence, is small enough to use the numbers to its advantage against its larger peers.

Sell, sell, sell
Then there are the pessimists who will be quick to point out that despite growing revenue by 22% during the quarter, income actually fell from a profit of $0.44 in the year-ago period to $0.42. This figure missed consensus estimates by $0.08.

Perhaps more troublesome than the falling income was management's lack of an explanation as to why income fell in the first place. As Foolish colleague Matt Koppenheffer was able to deduce, rising warehouse operational costs and the rising costs of goods purchased were probably the primary culprits for PriceSmart's income shortfall. Still, I find it very odd that management tried to sweep that one under the rug.

Finally, there's the whole valuation aspect of PriceSmart which, I've alluded to before, seems out of whack. With operating margins that tend to be only average relative to its peers noted above, it doesn't seem right that PriceSmart should be valued at 28 times forward earnings, six times book, or 31 times cash flow.

Striking the gavel
Perhaps this one should be opened up for further debate, but I'm going to stick with my original assessment that PriceSmart doesn't offer shareholders nearly enough return potential. There are cheaper alternatives in the sector that pay a better dividend and have far less heart-wrenching stock movements than PriceSmart.

But what do you think? Is PriceSmart a stock you'd consider putting in your basket or would you prefer to leave it on the shelf? Share your thoughts in the comments section below and consider adding PriceSmart to your free and personalized watchlist to keep up on the latest news with the company.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He admits to being a terrible consumer and tries to get out of shopping as often as possible. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Wal-Mart Stores and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of PriceSmart, Wal-Mart Stores, and Costco Wholesale, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that never sells itself short.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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