PriceSmart, Inc.'s (NASDAQ:PSMT) Shareholders Might Be Looking For Exit

There wouldn't be many who think PriceSmart, Inc.'s (NASDAQ:PSMT) price-to-earnings (or "P/E") ratio of 19.3x is worth a mention when the median P/E in the United States is similar at about 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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The earnings growth achieved at PriceSmart over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for PriceSmart

Although there are no analyst estimates available for PriceSmart, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is PriceSmart's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like PriceSmart's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 39% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 14% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that PriceSmart is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that PriceSmart currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for PriceSmart that you need to take into consideration.

If you're unsure about the strength of PriceSmart's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.