Costco Wholesale Corporation (COST) and PriceSmart, Inc. (PSMT) are two of the largest warehouse club operators in the United States. COST provides branded and private-label products, dry and packaged foods, and groceries, as well as apparel and small appliances. PSMT offers private label consumer products and provides other services, ranging from optical to automobile tires, to businesses and individuals.
While the pandemic-driven global recession affected brick-and-mortar retail stores deeply, businesses that have been able to meet the challenge by modifying their business models are emerging stronger. Furthermore, the mass vaccine rollout should improve the retail sales landscape markedly this year. This, along with the federal government’s new, jumbo recovery package, should boost consumer spending on products offered by warehouse companies like COST and PSMT.
Over the past year, COST has returned 21.9%, while PSMT gained 42.5%. Also, in terms of past six month’s performance, PSMT is the clear winner with 25.7% gains versus COST’s 4.1% loss. But which of these stocks is a better pick now? Let’s find out.
In January, COST introduced curbside pickup for groceries and general merchandise items in New Mexico, after holding it off for years. While its rivals, such as Walmart (WMT) and Kroger (KR), had already expanded their pickup offerings amid the pandemic, COST initially only offered pickup on expensive items, such as jewelry and electronics.
In February, PSMT announced its plans to build its ninth warehouse club in Colombia, which is expected to open this fall. In fact, it plans to now begin the construction of its 48th warehouse club in Guatemala and its 49th warehouse club in Jamaica, which are expected to open this year and next, respectively. The completion of these three clubs will mark the company’s 50-club milestone.
Recent Financial Results
During its fiscal second quarter, ended February 14, 2021, COST’s net sales increased 14.7% year-over-year to $43.89 billion. The company’s total revenue increased 14.6% from the prior-year quarter to $44.77 billion, while its net income was $951 million compared to $931 million for the second quarter of 2020. COST’s EPS came in at $21.15, representing an increase of 2.4% year-over-year.
In comparison, PSMT’s total revenue increased 3.4% year-over-year to $937.6 million in the fiscal second quarter, ended February 28, 2021. Its net merchandise sales grew 3.1% to $898.4 million from $871.7 million in the second quarter of 2020. The company’s net income rose 10.3% year-over-year to $28.33 million, while its EPS increased 8.2% from the year-ago value to $0.92.
Past and Expected Financial Performance
COST’s revenue and levered free cash flow have grown at a CAGR of 9.5% and 27.9%, respectively, over the past three years. In comparison, PSMT’s revenue and levered free cash flow grew at an annualized rate of 3.7% and 113.4%, respectively, over the same period.
COST’s revenue is expected to rise 14.6% in the quarter ending May 31, 2021. Also, a consensus EPS estimate for the current year represents a 14% increase year-over-year. Its EPS is expected to grow at the rate of 8.6% per annum over the next five years.
In comparison, the Street expects PSMT’s revenue to increase 22.3% next quarter. The company’s EPS is estimated to increase 26.3% in the current year. And its EPS is expected to grow at the rate of 15% over the next five years.
COST’s trailing-12-month revenue is significantly higher than PSMT’s. But PSMT is more profitable with a gross profit margin of 17.3% versus COST’s 13.2%.
In fact, PSMT’s EBITDA margin of 6% compares favorably with COST’s 4.6%.
In terms of forward EV/EBITDA, COST is currently trading at 20.59x, 64.3% higher than PSMT, which is currently trading at 12.53x. Also, COST’s trailing-12-month Price-to-Book of 10.33x is 227.9% higher than PSMT’s 3.15x.
COST is also more expensive in terms of trailing-12-month Price/Cash flow (18.32x vs 13.75x).
Both COST and PSMT have an overall B rating, which equate to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
While PSMT has a Value Grade of B, COST is graded a C, which is consistent with its relatively higher valuation multiples.
In addition, PSMT has a Stability Grade of B. In comparison, COST has a C, reflecting that it is more volatile versus its peers.
In terms of Momentum Grade, both COST and PSMT have a C, in sync with their past six month’s performance.
Of the 40 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #21 while PSMT is ranked #18.
In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both COST and PSMT for Growth, Sentiment, and Quality. Get all COST ratings here. Also, click here to see the additional POWR Ratings for PSMT.
Despite pandemic-related business restrictions, both COST and PSMT have been able to increase their net sales by investing in omni-channel platforms and offering improved services to their members. However, we think PSMT is a better investment now based on the factors discussed here. It has been expanding its geographical footprint and undertaking strategic investments to increase its market share.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry.
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COST shares were trading at $366.75 per share on Thursday morning, up $3.58 (+0.99%). Year-to-date, COST has declined -2.47%, versus a 11.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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