The Motley Fool's Top Stock for 2012 Continues to Execute

At the end of every year, the Motley Fool puts out a special free report on one stock we think every investor should at least consider making a part of his or her portfolio. For 2012, that stock was PriceSmart (Nasdaq: PSMT  ) , and you can review our reasoning by getting a copy of the report here.

PriceSmart is a company that, in many ways, mimics its former parent, Costco (Nasdaq: COST  ) , except that it does business in the Caribbean and Latin America instead of the United States. Read below to see why the stock is making big moves forward right now and what the outlook is going forward. Read all the way to the end and I'll offer up a special free report detailing how to capitalize on international markets.

What's it done so far?
Let's get one thing clear: Here at the Fool, we generally think investors should take a long-term perspective when it comes to investing. That usually means buying to hold a stock for at least three to five years. So while we'd like to see our "stock of the year" perform well over the course of 2012, we really think you should be looking toward 2015 and beyond.

So far, 2012 has been an up-and-down year for PriceSmart's stock. Overall, it's pretty much matching the return of the S&P 500. But for investors who clicked on our report and bought just after Jan. 6 -- when the company released an earnings report that disappointed some investors -- PriceSmart has offered up market-beating results.

PSMT Total Return Price Chart

PSMT Total Return Price data by YCharts.

Apparently, the company is making friends with investors again, as its stock has traded up by as much as 10% today. Here are a couple of the key metrics that some investors are happy to see.

Metric 

Q3 2012

Year-Over-Year Change

Revenue

$515.5 million

15.2%

Operating Income

$27.9 million

57.6%

Earnings per Share

$0.58

38.1%

Source: SEC filings.

Seeing income jump by such a huge margin when revenue was up 15% is something that begs for a little investigation. For starters, roughly 87% of all of the company's operating expenses come from the cost of goods sold. In other words, if PriceSmart sells something for $1, on average, that thing cost the company $0.87 to buy.

In the previous quarter, while revenue increased at a 15.2% clip, the cost of the goods the company sold only increased by 13.5%. That might seem like a small difference, but if the cost of goods sold had remained the same, then operating income would have only increased by 23%. That's a huge difference. 

The rest of the difference for the quarter came from the fact that club operations and general and administrative tasks both increased by far less than revenue.

What's the outlook moving forward?
Let's take a look at where PriceSmart is: The company has increased revenue by 16% per year over the last four years, and that growth has actually accelerated over the past two years, growing at a 21% clip.

On one hand, the stock now trades for 37 times earnings and 66 times free cash flow. On a short-term basis, that looks pretty pricey, and investors might get better chances to enter on a pullback.

On the other hand, long-term investors shouldn't haggle too much on the price of great businesses, as they tend to always trade for a premium. PriceSmart just opened its second store in Colombia, in the city of Cali, and has plans to open one more in the city in 2013. Furthermore, PriceSmart is solidifying its presence in its largest market, Costa Rica, by opening up a sixth store in the country next year as well.

There are rumors that Wal-Mart (NYSE: WMT  ) will be opening up a Sam's Club in Costa Rica sometime soon, and it will be interesting to see how the population responds to its offerings.

Personally, I've spent a great deal of time in Costa Rica, and know that the PriceSmarts are viewed very favorably, and the parking lot is almost always full of customers. The company has a prime spot in my retirement portfolio, and has outperformed the S&P 500 by over 100 percentage points for my All-Star CAPS profile.

Investors interested in other Latin American plays that might be a little less pricey should check out Arcos Dorados (NYSE: ARCO  ) or MercadoLibre (Nasdaq: MELI  ) , which are favorites of some of our top analysts.

There's another approach to international investing, too: You can profit from our increasingly global economy by simply investing in your own backyard. Our free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Fool contributor Brian Stoffel owns shares of PriceSmart and MercadoLibre. The Motley Fool owns shares of Arcos Dorados, Costco Wholesale, and MercadoLibre. Motley Fool newsletter services recommend Costco Wholesale, MercadoLibre, PriceSmart, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2012, at 8:24 AM, urche wrote:

    I echo your enthusiasm for Pricesmart in Costa Rica. I spend several weeks per year there and last trip went to two stores, both of which were well run, well stocked, and seemed popular with the locals and gringoes. And not just the Asian cheap quality goods one sees in other big box stores in Costa Rica. Brian, where are the stores you have seen? I frequent the Southern Pacific coast area, so I think the stores I saw were around Jaco and San Isidro.

    I will be exploring the idea of diversifying some of my COST holding by buying Pricesmart.

    Jerry (aka Urche)

  • Report this Comment On November 02, 2012, at 11:51 AM, TMFCheesehead wrote:

    Hi Jerry,

    Alajuela is where I'm usually located.

    Brian

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