An Area Bursting With Investment Potential

— “Calling the Trend” Column, by George Leong, B. Comm

The National Retail Federation recently predicted that holiday sales would fall one percent for the November and December months. I discussed the struggles ahead for the retail environment given the weak housing and jobs markets and the fact that consumers are more frugal.

However, there are some opportunities in retail, as consumers have to replenish basic necessities along with other household items. I have favored discounters for a while. Evidence of their success comes through Family Dollar Stores, Inc. (NYSE/FDO), a seller of goods that are mainly below $10.00, when it managed to beat Wall Street EPS estimates in its fiscal fourth quarter. FDO made 60.1 million dollars, or $0.43 per share, up from 53.2 million dollars, or $0.38 per share in the comparative fourth quarter. The results were above the Street average estimate of $0.41 per share.

Costco Wholesale Corporation (NASDAQ/COST) made less profits in its fiscal fourth quarter versus the prior year’s fourth quarter, but it beat Street estimates. Revenues did fall three percent year-over-year.

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The results will likely be similar for many other discounters, as shoppers look for bargains during these times. Even when the economy recovers, I feel that consumers will prefer to pay less money for goods and hence will continue to shop at club and discount retailers.

A discounter that I have been following since July is PriceSmart, Inc. (NASDAQ/PSMT), based in San Diego, California.

Founded in 1994, PriceSmart is to the Caribbean and Central America what Costco is to America. Regardless of where you live, the demand for and need for discount goods are significant and this area has above-average price appreciation potential given the global economic slowing.

PriceSmart has its headquarters in San Diego, but operates its current 26 U.S.-style membership shopping warehouse clubs in Central America and the Caribbean. Regions of interest include Costa Rica (five stores), Panama (four), Guatemala (three), Trinidad (three), Dominican Republic (two), El Salvador (two), Honduras (two), and Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands, with one store each.

Similar to stores in the U.S., PriceSmart stores sell high quality goods at low prices to consumers who join the club.

Compared to Costco and market leader Wal-Mart Stores, Inc. (NYSE/WMT), the valuation of PriceSmart is superior.

PriceSmart has reported higher sequential sales in each of the last four fiscal years ended in August, from 549.5 million dollars in FY04 to $1.12 billion in FY08. From FY99 to FY08, the company’s Compound Annual Growth Rate (CAGR) was a healthy 29.5%.

Looking ahead to FY09 and FY10, sales are predicted to continue to grow, but at a lower annual growth rate than the last 10 years. Sales for FY09 are estimated at $1.28 billion, and then are expected to rise 10.9% in FY10 to $1.41 billion.

On the earnings side, PriceSmart has been inconsistent over the last decade, with losses in five of the 10 years. The last five years have shown sequential improvement in the bottom line.

With an estimated five-year annual earnings growth rate of 15%, the PEG ratio is reasonable at 1.06. I feel there is more growth ahead.

Institutions hold a 35.8% interest in PriceSmart, which is relatively low and this will allow investors to enter a position earlier, just in case the stock attracts buying.