PriceSmart, Inc. (PSMT): Modest Prospects For This Discount Retailer

Family Dollar Stores, Inc. (NYSE:FDO) got a boost from the recent earnings report. However, continued pressure on the low-end consumer puts questions about how much upside is left for the stock. Analysts’ estimates for this fiscal year were lowered by 1% during the last three months, reflecting this trend. Family Dollar Stores has stated it is on track to open 500 new stores this year. It will be very interesting to see how those new stores perform after they have been opened for some time.

Bottom line

PriceSmart is relatively overvalued compared to other retailers. The company trades at a 27.9 forward P/E. The retail giant Wal-Mart trades at a 13.3 forward P/E, while Family Dollar Stores trades at a 16.8 forward P/E. The higher valuation must imply bigger growth perspectives, but I do not see this coming.

The rate of economic growth in Latin America and the Caribbean is not spectacular. Some regional currencies continue to depreciate. I would prefer retailers that have exposure to the U.S., where data shows incremental improvement in the state of the consumer. The rate of the improvement is not big, so I would not bet on explosive growth.

All in all, I do not see big upside in either of the above mentioned stocks. You can try Wal-Mart for its safe dividend, which currently yields 2.43%. PriceSmart, Inc. (NASDAQ:PSMT) looks fairly valued. Family Dollar Stores yields 1.52%, which is not enough to choose this stock for income.

The article Modest Prospects For This Discount Retailer originally appeared on Fool.com and is written by Vladimir Zernov.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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