An Emerging Megaretailer Trading Near Its Lows

Investors often hear the snake-oil pitch: "The Wal-Mart of [insert emerging market]." It's a great way to sell a stock, given that we all wish so much that we'd bought the superstore behemoth in its early days (even Warren Buffett). Unfortunately, you can't travel back in time, and you likely won't see an outlier company such as Wally World make its dramatic rise to retail infamy. Sorry. But we can find some imitators, some of which can still provide investors with handsome returns. One such stock is Chilean multibrand retailer Cencosud . Never heard of it? No problem, it's trading near its annual lows and has plenty of remaining upside potential.

Never heard of it
How could Cencosud be the Wal-Mart of South America if you've never even heard the name? Moreover, how could there be two Wal-Marts of South America, or even three if you include Wal-Mart? OK, let's put semantics aside and just look at the business.

Cencosud is headquartered in Santiago, Chile, and offers multiformat stores in the nation, as well as in Peru, Argentina, Colombia, and Brazil. In other words, the store is in markets that show robust demand for big-box, price-oriented stores. The company was founded by its chairman and was only this year listed on the NYSE.

Let's take a look at recent earnings to paint a clearer picture.

A clearer picture
In its most recent quarter, Cencosud brought in 14% more revenue than in the year-ago quarter, based on the consolidation of a recently acquired Colombian supermarket operation and improved same-store sales. The company tacked on a ridiculous 172 stores in the quarter -- adding 24% more selling space to an already robust number.

Gross profit was up more than 14%, with double-digit growth in every division except its financial services (which should not come as surprise).

Excluding some one-time procedural expenses, adjusted EBITDA rose 19%. The Chilean department store division grew EBITDA by an astounding 89%.

The company is in the process of deleveraging, lowering its net-debt ratio to 3.7 times -- high but manageable given the strong operating cash flows.

A growing business, priced fairly
Cencosud is growing fast, and the founding family remains deeply involved, representing three board seats. EV/EBITDA looks high at first glance -- more than 15 times. But investors should note that it is a bit misleading, on a trailing basis. Management is committed to paying down more debt in coming months, shrinking the company's firm value.

In general, I am highly reluctant to pay up front for growth -- and Cencosud is not the cheapest retailer, at a glance. Wal-Mart's firm value currently trades at just over eight times EBITDA, but doesn't offer near the growth prospects. Given the outsize growth the business seems to be experiencing, these valuation metrics may not be the best representation. Investors should take a close look at this up-and-coming retail giant to the south. You may not get Wal-Mart's 40-plus-year gain of 132,000%, but do you really need to for a successful investment?

Game-changing retailers
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