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Could PriceSmart, Inc. Become the Major Wholesaler of South America?

By Brian Stoffel - Feb 11, 2014 at 1:00PM

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Recent announcements of expansion plans shed light on management's strategy

By now, an overwhelming majority of the American population is familiar with Costco, the membership-based wholesaler that offers goods for cheaper than just about anyone.

The main reason Costco has been able to offer such prices is because the membership income itself accounts for the vast majority of profits—meaning products have razor-thin margins.

With the company filling out its presence stateside, many have wondered if it would take its value proposition to Latin America. That, however, is highly unlikely. PriceSmart (PSMT -0.19%), which was actually spun out of Costco back in 1993, already has the upper hand. For years the company has made its business by focusing on countries in Central America and the Caribbean, but based on recent news, investors should consider the massive potential in South America.

Source: PriceSmart.

In 2011, after decades of slow but smart growth, PriceSmart opened its first warehouse in South America, located in Barranquilla, Colombia. The news created a stir among investors, as they started to extrapolate the potential from the company moving into some large and growing economies.

Looking at the potential in such economies, they couldn't be blamed for getting excited. Here's the 2012 GDP of countries where PriceSmart has the greatest presence in the Caribbean and Central America. Then take a look at the potential in South America.

Source: infogr.am.

You might notice that Brazil, by far the largest of all South American economies, was left off the list. That's because Wal-Mart currently has about 500 locations in the country, and though its membership-based model of Sam's Club isn't too prevalent, it easily could be if PriceSmart were to try to enter the market.

Since announcing the acquisition of land in Barranquilla, PriceSmart's stock has jumped by just over 160%. But even though earnings have grown by about 60% since then, the rest of the pop in the stock's price has come because investors are putting a higher valuation on it. What back then was a stock with a P/E of about 20 is now a stock trading for about 33 times earnings.

Why are investors still so excited?

Recent announcement to accelerate South American growth
By all accounts, the initial store in Barranquilla was a big hit. Over the next two years, the company opened a two stores in Cali, Colombia, and once again, they proved popular with the local population.

But the company surprised many in January when it announced that it would be doubling its presence in the country, with stores set to open in Pereira, Medellin, and the capital city of Bogota. All three stores are set to open before the end of 2014.

The company already had tested delivery of products in Bogota, and the plan apparently had done well enough that PriceSmart was confident in entering the city.

Such moves are exciting for investors, but caution should be exercised as well. PriceSmart certainly could end up becoming a major force in Colombia and beyond. But the company also has a history of slow and smart growth, and such rapid plans for expansion could lead to growing pains.

I personally intend on holding all of my shares right now, which account for about 5% of my retirement holdings. Moving forward, investors will have to keep a close eye on both how the company's new stores are performing and what the rate of expansion will look like.

Brian Stoffel owns shares of PriceSmart. The Motley Fool recommends Costco Wholesale and PriceSmart. The Motley Fool owns shares of Costco Wholesale. 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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