PriceSmart is a smart play for 2024 with multiple tailwinds

Key Points

• PriceSmart pops 10% after reporting a solid quarter with top and bottom-line strength. 
• The Q1 report reveals numerous levers for growth and earnings that will play out in 2024.
• The stock offers value and yield compared to US-based competitors and is a solid play on EMs. 

PriceSmart NASDAQ: PSMT, as good an investment as it is, has struggled to gain traction with price shares, but that struggle is ending. PriceSmart is well-positioned generally but specifically for 2024 because its business centers on EMs in Latin America, growing organically and building leverage via store count and membership growth. The takeaway is that this company is building a valuable lever for shareholder returns, and the Q1 results have this market on the move. Shares are up 10% in pre-market action, confirming support at critical levels and indicating a high probability of a sustained rally. 

PriceSmart is levered for success

Shares are up on what can only be called a solid report. The company reported $1.17 billion in revenue for a gain of 11.4% over last year. This is slightly better than the analyst forecast but more significant because its larger, US-centric competitors like Walmart NYSE: WMT and Costco Wholesale NASDAQ: COST are only expected to grow 3% and 5% in the comparable quarter. Net merchandise sales are up 10.7%, aided by a 6% increase in store count, 6.8% FX tailwind, 4.3% organic comp sales growth and an 11% increase in membership. 

The combined impact of multiple growth levers resulted in a significant margin improvement. The company’s GAAP and adjusted earnings grew by 15% to outpace the top line by 360 basis points. The earnings are $0.12 better than expected, and strength should continue into the 2nd quarter. 

PriceSmart did not give guidance in the press release but is set up for strength in 2024. Latin America and the Caribbean growth is expected to accelerate to 2.3% in 2024 and then to 2.5% in 2025, outpacing the US by 150 basis points or more. The company is also building momentum with store count, membership, and comp sales, which are not fully reflected in the quarterly results. Analysts may also underestimate the company’s potential, forecasting 10% top-line growth in 2024. 

PriceSmart is value and yield among membership clubs

PriceSmart offers value and yield to investors on top of an opportunity for market-leading growth. The stock trades at only 16.5X this year and 15.5X next year’s earnings estimates, while Walmart is closer to 24X and 22X and Costco in the low-40s. All three pay reliable dividends, Walmart the highest with a yield near 1.45%, but value and the outlook for distribution growth make PriceSmart a great play for investors with time on their hands. 

The 1.25% payout ratio is less than 25% of the 2024 earnings forecast and well-covered by cash flow. The balance sheet has some debt, but is net cash, and leverage is low. Dividend increases may not be great; the CAGR is in the mid-single-digit range, but annual increases may be sustained for many decades with numbers like this. The balance sheet and cash flow also allow for share repurchases; the share count is down 1.45% YOY at the end of Q1.

Institutions and analysts support the action in PriceSmart 

Marketbeat only tracks two analysts with coverage on PriceSmart, but they are bullish on the name. They rate the stock at Moderate Buy and see it trading near $82. That leaves little meat on the bone for new investors but is likely a low target; the Q1 results may spur them to revisions. The freshest coverage is from Jeffries, which was initiated in December 2023. 

Institutions own about 82% of the stock and bought on balance the first three quarters of 2023. They turned bearish in Q4, aligning with the dip in the price action, but the Q1 2024 action so far is 100% buying. The top two holders are BlackRock and Vanguard, which account for 22% of the stock; numerous holders are also in the 1% to 9% range. 

The technical outlook: PriceSmart confirms support

The price action in PriceSmart is up 10% in premarket trading, indicating solid support at the 150-day and 30-day EMAs. This action shows support from short and long-term traders and may turn into a sustained rally. The risk is resistance near $82. The peak set in August coincides with the analysts' consensus and may cap gains. A move above $82 would be bullish and could take the market up the $90 region by mid-year.