Is Primo Water Drowning?

Primo Water (Nasdaq: PRMW  ) is taking on water -- and that's not a good thing.

The fast-growing company that was seemingly carving out a cozy living by offering purified drinking water in exchangeable 3- and 5-gallon bottles through a growing number of supermarkets and retailers needs money.

A filing yesterday details Primo's plans to raise $75 million through new equity. Investors should always be suspicious when a company is printing new shares at a time when the stock's hitting rock bottom, and that's exactly what we have here.

Primo's stock peaked at $16.45 back in April, plummeting all the way down to $3.14 yesterday. The dire panhandling detailed in the filing is naturally dropping the shares even lower today.

In a troublesome admission, Primo claims that earnings aren't even enough to cover fixed expenses at the company. Primo's ratio of earnings to fixed charges has been negative every year dating back to 2006.

Why didn't Primo raise more money when its stock was trading in the mid-teens earlier this year? What will this mean for the delayed rollout of the flavorstation home beverage system that was supposed to take on SodaStream (Nasdaq: SODA  ) ?

SodaStream didn't have to worry after Primo conceded last month that flavorstation sales wouldn't top $2 million in 2011. However, the cash crunch makes it unlikely for Primo to field a worthy challenge come 2012 either unless it's successful in this highly dilutive offering.

SodaStream is perpetually landing new distributors, while Primo seems to have only nabbed home improvement superstore Lowe's (NYSE: LOW  ) as a retail partner for flavorstation. SodaStream is rolling out national commercials. Where you at, Primo?

Primo has been posting healthy top-line growth in recent quarters, but clearly that's not enough. Trying to raise money -- now -- simply muddies up the water.

Motley Fool's top stock for 2012 isn't Primo Water thankfully. If you want to find out what it is, a special report reveals all. It's entirely free, but will only be available for a limited time, so check it out now.

Motley Fool newsletter services have recommended buying shares of Lowe's Companies and SodaStream International; and writing covered calls in Lowe's Companies. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (6) | Recommend This Article (5)

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  • Report this Comment On January 02, 2012, at 12:23 AM, spsmith18 wrote:

    Just wondering if Mr. Munarriz is short this stock. His disclosure states he does not own any shares, but selling shares short is not the same as owning them!

    His extremely negative article overlooks some very salient points:

    1) Primo Water filed a $75 million shelf, which is not at all the same as issuing shares. It give the company the ability to raise funds quickly through a variety of measures (stock, debt, etc.) if needed, but in no way guarantees that any offering (or any financing, for that matter), will take place.

    2) A single director of Primo Water, David Warnock, bought over 1% of the float (over 300,000 shares) over approximately one week in mid-December. There have been additional insider buys over the past two months. This is generally a bullish signal and certainly not a catastrophically negative one.

    3) The stock price has rebounded recently and seems to be basing around $3. News of the shelf filing took the stock down over 10% intraday, but it rebounded to nearly flat and closed down only 3%.

    So please answer the question, Mr. Munarriz, are you short PRMW?

    All of this is IMHO, of course.

    Disclosure: Strong Buy

  • Report this Comment On January 02, 2012, at 11:47 AM, ryanalexanderson wrote:

    spsmith18 - From the explicit link to the full disclosure policy at the bottom of the article:

    "All Fool employees and contractors -- that's anyone with a TMF prefix on their screen names -- are required to publicly disclose their current individual positions on their personal profile pages on the Fool.com website. (We do not disclose the individual stocks that might be in a Fool's mutual funds.)"

    An "individual position" would cover shorts as well as longs.

    Rick's concerns seemed like common sense and you did not address them. Earnings problems and unfavourable capital raising conditions. They have to do with the health of the company rather than "bullish" sentiment, which seems to be your points 2) and 3).

    Unless of course, you're suggesting that bullish sentiment will drive the stock back up to a point where raising capital in a new offering will be much more favourable. But that's kind of putting the cart before the horse.

  • Report this Comment On January 02, 2012, at 4:48 PM, TMFBreakerRick wrote:

    spsmith18, I am not short PRMW -- or else it would be explicitly stated in the disclosure.

    I didn't write that the PRMW was successful in raising $75 million, only that it "plans to raise" the money. Yes, this is a shelf registration that may take months -- or as long as three years -- to play out, but the overhang is there. It won't be easy to get investors excited knowing that it's coming, so it may be in PRMW's best interest to peel this Band-Aid off quickly and get it over with.

    I have credited PRMW in the past for its ability to grow its bottled water business, but if you didn't read the bottom of the third page in the filing without the hairs on the back of your neck rising when the company conceded that it's not even making enough money to pay its FIXED expenses, your mettle is brazen.

  • Report this Comment On January 02, 2012, at 6:18 PM, MFPRMW wrote:

    "A filing yesterday details Primo's plans to raise $75 million through new equity" The statement you start the article off with makes it sound as if they WILL be issuing EQUITY and it'll BE SOON. This is a gross misrepresentation of the filing. They COULD also issue debt or a blend.

    Yes they are not making enough to cover fixed expenses, as with most fast growing companies. At least they are growing the top line rapidly (but not as rapid as I and other shareholders would like) They were allowed to increase their revolver to 25M from 10M at the end of November, the bank obviously assessed the risks and found that Primo should be able to handle the increase.

    I'm not 100% sold on PRMW as I'd like to see them execute on their promises, but this is article is over the top. They are currently selling at 50% of forecasted 2012 sales and have little debt at the moment and have seen some insider buying over the last month. The biggest reason for the dramatic drop was Mellon dumping out and hopefully that bloodbath is over.

  • Report this Comment On January 02, 2012, at 11:17 PM, spsmith18 wrote:

    May I quote from Mr. Munarriz's article for his benefit and also that of Mr. Alexanderson:

    "A filing yesterday details Primo's plans to raise $75 million through new equity. Investors should always be suspicious when a company is printing new shares......"

    This shelf offering is not a guaranteed "printing of new shares" for $75 million or even $75, for that matter. It only permits the POSSIBLE raising of capital, through a variety of possible instruments.

    As MFPRMW succinctly stated, this is a gross misrepresentation of the filing. It's something I would expect from a basher on a message board, not from a columnist like Mr. Munarriz. His statement is not to be defended as "common sense" by Mr. Alexanderson. It's flat-out incorrect and misleading.

    This over-the-top negativism is what led to my question regarding a short position. It only seemed logical.

    Disclosure: Strong Buy

  • Report this Comment On January 06, 2012, at 10:09 AM, upndn wrote:

    Strong Buy is not a disclosure.

    It is a sentiment.

    Rick, thanks for the heads up.

    Disclosure: No position, just watchin'

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