Is PriceSmart Running Into a Buzz Saw?
With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards -- but a better way might be to look for stocks based on what you already know and own.
Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it does target areas in which you already have an interest.
By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.
Based on my outperform ratings on food-and-staples retailer Winn-Dixie, which was recently acquired by the Bi-Lo chain, the CAPS supercomputer thought I also might be interested PriceSmart (NAS: PSMT) , one of five Stocks of the Day it recently offered up for my consideration.
Let's see what the in Latin American warehouse-club operator has going for it that might warrant an investment, even if it hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.
|Industry||Food & Staples Retailing|
|Market Cap||$2.1 billion|
|Revenues, TTM||$1.8 billion|
|Return on Capital, TTM||13.2%|
|Dividend & Yield||$0.60, 0.9%|
|Long-Term Debt||$64.0 billion|
Source: Motley Fool CAPS; S&P Capital IQ.
Buy what you know
Because Brazil dominates the discussion of growth in Latin America, investors often lose site of the potential and pitfalls in other economies beyond its borders. Last year Brazil's growth rate weakened to just under 3%, and economists peg its growth for 2012 to 3.2% with Fitch Ratings calling it "below potential" and central bankers for nine South American countries also seeing their own growth rates moderating this year.
Of course, this focus on Brazil and South America all the time excludes what's going on in Central America and the Caribbean, areas which are key in understanding PriceSmart, because that's where its operations are concentrated.
On the surface the situation doesn't seem much better, as Fitch says the region is "unlikely to regain its pre-crisis growth rates." But the interesting thing is, at 4.5%, Central America's growth rate is still much better than South America's and is nearly double the rate in the U.S., where Moody's is looking for just 2.5% growth. It also puts it ahead of Mexico, too.
And just for completeness, the Caribbean is expected to grow at a 1.7% rate, which in comparison seems anemic, but the economies there expanded at just 0.7% in 2011, so this is a relative blossoming of opportunity.
Clubbing the competition
PriceSmart is following the growth model set out by both Costco (NAS: COST) and Wal-Mart's (NYS: WMT) Sam's Club, of developing a membership-based wholesale club experience. Like its rivals, it operates on thin profit margins -- margins that are even lower than its peers -- but it has enjoyed revenue growth that far exceeds either.
Over the last five years PriceSmart's revenues grew at an 18% annually compounded rate, compared to 8% at Costco and just 5% at Wal-Mart. Net income has also outstripped both competitors, surging 34% annually over the same time period, compared to around 7% for its rivals.
Although Wal-Mart has a heavy presence in Mexico to the north and Brazil to the south, it doesn't really reach into Central America, where PriceSmart remains the top dog. Even so, PriceSmart doesn't completely exploit its advantage because the savings it wrings out of its suppliers are passed on to the consumer. Should Wal-Mart choose to enter the region, though, PriceSmart might need to change tactics or could end up feeling the pinch.
Looking ahead, analysts forecast 15% growth over the next five years for PriceSmart, putting it ahead of its two closest peers, but also better than other retailers like Target (NYS: TGT) , Safeway, and Kroger (NYS: KR) .
CAPS member Stevie07 has looked at its muscular numbers and agrees it's destined for further expansion beyond the competition:
Even though EBITDA and EBIT margins are low, they are still higher than competitors Costco and Wal-Mart. PSMT is growing in an emerging market area (South America) and the CEO came from Costco. PSMT has been able to grow revenues, memberships, and net income each year and while increasing margins slowly. It will outperform the S&P over the long term.
A smart chance
While there is the risk of political upheaval in these Central American countries, PriceSmart seems well-positioned to survive. At 34 times trailing earnings and 24 times estimates, it is richly valued, yet about the same as Costco. I've gone and marked it to outperform on CAPS, but add it to your Watchlist and let me know on the PriceSmart CAPS page or in the comments section below if you think its smart to look at that sweet spot between Mexico and Brazil for opportunity.
If PriceSmart doesn't pique your interest, we've compiled a special free report for investors, "3 American Companies Set to Dominate the World," which gives a rundown of three American companies set to take over emerging markets. The report is 100% free, but it won't be around forever, so click here to access it now.
At the time this article was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Costco Wholesale and Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Costco Wholesale, PriceSmart, Wal-Mart Stores, and Moody's; and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.