Should PriceSmart Inc’s (NASDAQ:PSMT) Recent Earnings Decline Worry You?
Understanding PriceSmart Inc’s (NASDAQ:PSMT) performance as a company requires examining more than earnings from one point in time. Today I will take you through a basic sense check to gain perspective on how PriceSmart is doing by evaluating its latest earnings with its longer term trend as well as its industry peers’ performance over the same period. See our latest analysis for PriceSmart
Was PSMT’s weak performance lately a part of a long-term decline?
PSMT’s trailing twelve-month earnings (from 28 February 2018) of US$74.31m has declined by -17.20% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 4.89%, indicating the rate at which PSMT is growing has slowed down. What could be happening here? Let’s examine what’s going on with margins and if the rest of the industry is feeling the heat.
Revenue growth in the past couple of years, has been positive, however, earnings growth has fallen behind meaning PriceSmart has been growing its expenses by a lot more. This harms margins and earnings, and is not a sustainable practice. Scanning growth from a sector-level, the US consumer retailing industry has been growing its average earnings by double-digit 16.61% in the previous twelve months, and a more subdued 5.29% over the last five years. This suggests that whatever uplift the industry is profiting from, PriceSmart has not been able to realize the gains unlike its average peer.
In terms of returns from investment, PriceSmart has not invested its equity funds well, leading to a 10.29% return on equity (ROE), below the sensible minimum of 20%. However, its return on assets (ROA) of 6.59% exceeds the US Consumer Retailing industry of 5.83%, indicating PriceSmart has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for PriceSmart’s debt level, has declined over the past 3 years from 20.72% to 15.76%.
What does this mean?
Though PriceSmart’s past data is helpful, it is only one aspect of my investment thesis. In some cases, companies that face a prolonged period of reduction in earnings are undergoing some sort of reinvestment phase with the aim of keeping up with the recent industry disruption and expansion. I suggest you continue to research PriceSmart to get a more holistic view of the stock by looking at:
Financial Health: Is PSMT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Valuation: What is PSMT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PSMT is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 28 February 2018. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
