Has Primo Water Hit Rock Bottom?

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Things have gone from bad to worse to utterly horrifying for Primo Water (Nasdaq: PRMW  ) shareholders. Since its last quarterly earnings report, shares of the distributor of exchangeable multigallon exchangeable water containers have been slashed in half.

Its fourth-quarter loss of $0.10 per share came in $0.02 below analyst expectations, and the company trimmed its outlook for the year. That report sent shares down about 30%, but they've been in freefall ever since, sinking as low as $1.34 last Friday. Two new credit agreements sent shares up momentarily, but they turned out to be nothing but a break in the current.

The initial response to the financing arrangements would seem to indicate that investors think Primo is on life support. Shares jumped more than 40% at one point on April 13, when the first announcement was made, though they quickly retreated back to former levels.

A closer look at Primo's balance sheet reveals almost $15 million in total debt due this year, and little cash on hand, but the stock seems to have been punished disproportionately, trading at about $0.79 per dollar of tangible book value. Its hard assets alone -- the property, plant, and equipment -- are worth more than the stock, a strange proposition for a company whose top line is expected to grow 25% for the next five years. At a price this low, it's hard to not see the water distributor as a turnaround value play.

The market has been running scared from beverage peers such as Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and SodaStream International (Nasdaq: SODA  ) , two other fast growers using razor-and-blade models. Shares of Green Mountain dropped nearly 50% Thursday, when the maker of the Keurig single-serve coffee brewer missed earnings and cut guidance for the year. As a result, SodaStream, which often trades in tandem with Green Mountain, sank nearly 10% to new 2012 lows, more than 30% off its peak earlier this year. Shorts have piled into SodaStream and now hold 85% of the float, a clear indication that the market believes the countertop soda machines are a fad. Primo Water may also be taking some residual punishment, as its shares also dropped 10% last Thursday.

With Primo set to reporting earnings Tuesday after the markets close, let's take a look at three items investors should be looking for.

  1. Show me the cash flow
    I'd like to see Primo stabilize its balance sheet and get out from the revolving debt door. With just $751,000 in cash and current liabilities outnumbering current assets at its last report, it needs to start making some steps toward positive cash flow. The company had operating cash flow of negative-$8.8 million in its most recent quarter, which was the fourth consecutive quarter of declining OCF. That streak needs to stop. Even though investors are expecting a bigger EPS loss this quarter, I'd like to see operating cash flow come in at better than negative-$5 million, but some improvement is necessary to restore confidence.
  2. Improve those margins
    Consistent with my desire to see steps toward profitability, the company needs to prove that its business model works by ending its streak of collapsing gross margins. In Q1 of 2011, the company posted a figure of 29.3%, but by the end of the year it had shrunk all the way to 16.1%. The decline could be coming from selling the lower-margin base systems instead of the consumables, but it's hard for any company to turn a profit with a gross margin of just 16%. That figure needs to turn around.
  3. Hit your estimates
    Shares of Primo have plunged on its last three earnings reports as either quarterly numbers or company guidance have been way off expectations. The company's last quarterly report came March 15 with almost all of the first quarter in the past, so let's hope management knew what it was talking about when it provided guidance. With a sales projection of just $19.7 million to $21.4 million and non-GAAP EPS loss between $0.07 and $0.09 per share, the numbers certainly seem beatable if not conservative. It would be hard to keep faith in the company after another quarterly miss.

Based on our CAPS rating system, investors still seem bullish on Primo, giving it a five-star rating. Many have cited founder and CEO Billy Prim's success with Blue Rhino, an exchangeable propane company that uses a similar business model to Primo. Investors were confident enough in Primo to buy in at an IPO price of $15 a share, but with prices down below $1.50, it looks as if Prim's backed himself into a corner. After a litany of mistakes, including a botched FlavorStation rollout during the holiday season, it's time for him to deliver. This may be his last shot at redemption.

With its fast growth and unique razor-and-blade model in the water business, Primo Water could be considered to be a Rule Breaker. But lucky for you, our experts have found a similar high-growth company that's giving its shareholders positive returns, and market-beating ones on at that. You can get the scoop on this hot stock in our special free report: "Discover The Next Rule-Breaking Multibagger." The report gives the name of the company and explains why it has so much upside potential. Get the report right now.

Fool contributor Jeremy Bowman owns shares of Primo Water and SodaStream International. The Motley Fool owns shares of SodaStream International. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and SodaStream International and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (2)

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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 May 08, 2012, at 1:24 AM, roman60 wrote:

    I believe the low price of primo is primarily due to poor performance by its marketmaker. I have seen prices do this before when the marketmaker shorts stock to the public on news and then buys it back at a lower price later. With the income and sales increases this company has demonstrated over the last few years there is really no reason for the stock to have dropped below $2.20. Poor timing on rollout? ok stuff happens, but with current sales being what they are any investor is buying the future of the company and not current results. There are plenty of other companies out there that have worse numbers but investors are bidding them up due to what they expect in future sales and profits. Good luck and happy trading!!!

  • Report this Comment On May 08, 2012, at 10:54 AM, harperasset wrote:

    Their business model is unsustainable. It costs very little more to have water delivered to your home/business by Culligan, and that eliminates the inconvenience of hauling very heavy bottles of water from the grocery store. Growth has not been that impressive: it has been obscured by acquisitions in the past. This one is probably going to zero.

    The fact that Primo is ranked 5 stars tells you a lot about the quality of what passes for fundamental analysis on this site.

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