PriceSmart PSMT: Colombia elections are a potential catalyst for growth
PriceSmart is a Costco-style warehouse store chain that operates exclusively in Latin America and the Caribbean. The founder of PriceSmart, Robert Price, was actually a Costco executive in the early 90’s before his segment was spun off. He saw the potential of the Costco model, but recognized that Costco and Sam’s Club had saturated the US market. PriceSmart began to develop stores in Latin America and the Caribbean instead. The PriceSmart chain today is remarkably similar to Costco:
- Yearly membership fees contribute a major share of total earnings
- Both companies have relatively low debt. Long term debt/equity for COST is 0.18 and for PSMT it is 0.10
- Same store revenue growth for both companies has been similar: in the most recent quarter COST was at 7.4%, while PSMT was at 7.8%.
The main difference for investors is that COST mostly operates in stable, developed markets, while PSMT does not. It’s important to note that PSMT is headquartered and listed in the US, on the NASDAQ. PSMT has additional currency and political risk, but not additional Governance risk. The market has priced in these risks with lower valuation ratios. COST currently has an EV/EBITDA of 33.0 and for PSMT, it is 13.7.
Why am I bullish on PSMT right now? Because there’s an extremely consequential election this month in Colombia, which is the company’s most important market. And the election results have the potential to drive growth for years and election related downside is very limited.
Of PSMT’s total 7.8% same store revenue growth in the most recent quarter, Colombia contributed nearly half of this growth. And there appears to be the potential to rapidly increase store count in the country. Colombia has a population of 54 million and only 10 PriceSmart stores. In comparison, Costa Rica has a population of 5.2 million and it has 9 stores. Store growth in Colombia has been limited by permit restrictions and organized crime.
***The next section is about the election and overall political situation in Colombia. I am not claiming one result or another is better for the people there. I am writing about it from an investor’s perspective because I believe the election results will significantly affect the company’s growth potential.***
The current political party in power is the left wing “Historic Pact”. This party is generally popular with the working class and indigenous people. This party recently passed a massive, 24% increase in the minimum wage. Their main competition this cycle is the “National Salvation” party, with presidential candidate Abelardo de la Espriella. His plans to deal with crime have been compared to Nayib Bukele’s: militarization of the police and mass arrests. Espriella also wants corporate deregulation, free trade, and improved relations with the US.
PSMT will directly benefit if there is a change in power this election cycle:
- A much lower corporate tax rate
- Lower security and theft costs for transportation and warehousing
- The potential to expand to new parts of the country if the security situation improves
- Decreased permitting restrictions could greatly increase store count.
- Decreased risk of a trade conflict with the US
Investors are likely to price in these improved growth prospects soon after a favorable outcome occurs. A nearly identical scenario already unfolded earlier this year in Costa Rica, the company’s second most important market. A right wing populist party won the final round of the election on February 1st of this year. PSMT stock price went up 9.5% in the 2 weeks after the election on no other news, while the S&P 500 was down.
If the same scenario occurs in Colombia, I expect the impact to be larger. It’s a more important market because it drives company wide growth. And there’s far more potential for store count growth. The store to population ratio in Colombia is ten times lower compared to Costa Rica. If the election results end up unfavorable, from an investor’s perspective, there’s not much downside. There’s no change of power and PSMT has already shown that it can grow in this market with the current government.
Betting markets currently have 62% odds that there will be a change in party this election. The first round is on May 31st.
I have 100% of my portfolio in PSMT. About $90K with an average cost of $157.5 per share.
