With emerging markets expected to diverge from developed markets in the 2nd half, PriceSmart (NASDAQ: PSMT) looks like an intelligent play. According to GlobalXETFs, low valuations and secular growth stories provide structural opportunities for investors.
The opportunity in PriceSmart is two-fold- the company continues to expect growth and is supported by deepening penetration of existing markets and new store count. That combination has the chain of membership warehouse clubs on a sustained growth trajectory, and it trades at a value compared to its US-based counterparts.
The Q3 results were tepid regarding the analyst expectations and sent the stock down in early trading, but this is an opportunity for investors. Shares of PriceSmart have been under pressure for more than 2 years while the company has grown and improved profitability, the stock price may not enter a complete reversal now, but the depths of the correction have been plumbed.
PriceSmart Has Solid Quarter, Widens Margin, Shares Fall
PriceSmart had a solid quarter bringing in $1.1 billion in net revenue for a gain of 6.4% compared to last year. The bad news is that the revenue gain is as expected and priced into the market. However, the details that long-term investors should focus on are the fact that store count is up nearly 20% since Q3 of 2019 and revenue 40%.
That’s a clear signal of strength. On a net-merchandise basis, sales are up 7.1% YOY and comp sales 5.8%. Interestingly, this company is experiencing FXN-related issues, but they positively impact the results. FX translation added about 150 bps to the top line and may continue to support results this year.
The margin news is equally mixed in that margins widened but not enough to satisfy the analysts. The takeaway is that operating income increased by 27.5% and net income by 53.6% to produce $0.94 in GAAP income and $1.02 in adjusted EPS. The adjusted EPS is up 64% compared to last year but missed by 2 cents. Compared to 2019, GAAP earnings are up more than 100% and helping to fuel the company’s growth strategy. The company’s balance sheet is a fortress with long-term debt leverage at less than 1X equity.
PriceSmart’s growth, cash flow, and capital position led the board to authorize a share repurchase program. The authorization is good for $75 million and comes with no expiration. The $75 million is worth about 3.2% of the pre-release market cap and should help support the price action over the next few quarters to a year.
The Sell-Side Pressure In PriceSmart Is Easing
Sell-Side pressure in the form of insider selling appears to be easing. The insiders and major shareholders own about 17% of the stock and made regular and relatively large sales until April 2023. The selling activity halted in tandem with a price top reached in April and may not resume, given the outlook for share prices. Trading at 20X earnings, this growth story is lightly valued relative to Walmart’s (NYSE: WMT) 25X and Costco’s (NYSE: COST) 36X with less competition in a large and expanding market.
The price action may struggle to gain traction, but a bottom in play exists. The market hit bottom in late 2022 and is on the brink of a complete reversal. There is resistance at the baseline of the reversal pattern, which is a Double-Bottom or irregular Head & Shoulders, but the market looks ready to blow through it. In this scenario, the stock could climb to $88 or higher.
