PriceSmart Well-Positioned In Emerging Markets
PriceSmart (NASDAQ:PSMT) is an interesting investment in that it provides exposure to emerging markets/Latin America and consumer trends at the same time. The company operates a chain of membership warehouse clubs akin to a Sam’s or Costco and it’s growing as well. The company is facing some headwinds in the near-term but managing them well. The question now is whether the company is a buy after the FQ1 earnings report or waiting for lower prices is a good idea.
In terms of its valuation, Pricesmart appears to be fairly valued relative to its U.S. counterparts. The company is trading at 31X this year’s earnings and 25X next which puts it at a slight discount to its peers. Costco (NASDAQ:COST), hands down the premier membership club in the U.S., trades closer to 37X and 34X its earnings while Walmart (NYSE:WMT), parent of Sam’s Club, is closer to 25X. Walmart may seem like a bargain relative to Costco but Costco is a pure-play on membership clubs and Walmart is not. Target (NYSE:TGT) is a good proxy for the “other half” of the Walmart story and it trades at only 21X and 20X its earnings estimates.
PriceSmart Growth Despite Headwinds
PriceSmart had a good quarter and one that was far stronger than expected. The $877.43 million in net consolidated revenue is 8.1% higher than a year ago and beat the consensus by 475 basis points. Not only that, but revenue growth is up on a sequential basis with growth accelerated from 1.15% and 1.4% reported in the calendar Q2 and Q3 2020 periods. In terms of comps, store comps at locations open more than one year are up 3.3% and boosted by the addition of two new stores.
Moving down the report, the company’s net operating income jumped 45% on a YOY basis as operating efficiencies take hold. On the bottom line, the GAAP EPS of $0.90 beat by $0.23 and points to better than expected results later in the year as well.
As far as guidance goes, the company refrained from giving any but did give some update on operations. The F2Q period got off to a shaky start as COVID cases and shutdowns began to impact business again. The silver lining is that sales in the first month of the quarter, December, appear to be holding steady. The company reports store comps are down -1.7% but that is due more to the -2.9% impact of negative currency conversion than anything else. The company’s expansion more than offset the difference, driving net merchandise sales to a 2.8% gain.
“Although varying pandemic-related restrictions throughout our markets were on the rise again in December and continue to impact the business in early January, thanks to our tremendous team, we are becoming increasingly adept at early monitoring and quickly adjusting to challenges as they arise, as well as anticipating the needs and preferences of our Members,” said Sherry S. Bahrambeygui, Chief Executive Officer.
PriceSmart Pays A Safe Dividend
PriceSmart pays a small but safe dividend to help offset some of the risks associated with emerging markets. The $0.70 in annual payout is less than 1.0% in yield and comes with zero expectation of cut or suspension. The payout ratio is running about 25% of the consensus earnings for 2021 which, now, is far too low and backed up by a fortress balance sheet. The company’s high cash position, low debt, and leverage all suggest its growth efforts and dividend are more than secure. In fact, although it’s been a few years since the last increase, investors would not be out of line to expect a dividend increasein 2021.
The Technical Outlook: PriceSmart Sets New High
Shares of PriceSmart surged about 5.0% in premarket trading to set a new five-year high. The move is a continuation of trends that have been in place since early spring and the signs point to some additional upside in the near-term at least. There may be some resistance at the $104 level but, if it can be surpassed, a move to retest the all-time highs near $120 is likely.
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