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We all know the set-up. You find a cool product, ogle at its great price, buy it, bring it home, use the heck out of it, and soon find the consumable replacements cost you serious coin. Not so great for your pocketbook, but glorious for the manufacturer. Primo Water (Nasdaq: PRMW ) is banking on this business model for its future growth, but will it generate the profitability this company desperately needs?
Let’s take a closer look at why you should think thrice about Primo.
A great business model doesn’t necessarily yield a successful company
Primo Water’s razor-and-blades business model generates recurring revenue from water bottles, syrups, and carbonators for both its water dispensers and its at-home soda-maker Flavorstation products. But this business model doesn’t always equal triumph. Exhibit A: Green Mountain Coffee Roasters (Nasdaq: GMCR ) , a company plagued by accounting irregularities, ballooning inventory, patent expirations, and frothy valuations.
One case where this model has worked brilliantly is SodaStream (Nasdaq: SODA ) , a company that’s shouldered residual -- albeit unnecessary -- punishment as a result of Green Mountain’s failures. The Israeli SodaStream is forging smart strategic partnerships, holds virtually no debt, and enjoys incredible sales and earnings growth.
Insatiable thirst or saturation?
Consumers adore fizzy, customized beverages. And they love gadgets. Marry the two, and you’ve got a $39 billion U.S. market for at-home carbonated beverages. Despite the risk of at-home soda making becoming a fad, European countries that claim less than half the soda consumption than the U.S., use these at-home products heavily. SodaStream enjoys 25% market penetration in Sweden, and has achieved 80% market share in some European countries. In all fairness, Primo’s Flavorstation is in its infancy by comparison but, so far, Primo has stumbled to keep up.
Primo’s Flavorstation is sold at mega-retailers Lowe’s (NYSE: LOW ) and Wal-Mart (NYSE: WMT ) , from whom Primo derives 37% and 21% of net consolidated sales, respectively. Primo expects increasing international sales to help it compete with SodaStream, but it’s going to need to build some lofty partnerships to go head-to-head with its more dominant competitor. SodaStream is slated to invade U.S. supermarket and drug retailer shelves with its DIY soda makers in 2014.
Enough flavor to keep business afloat?
Primo’s shaky cash position puts into question the company’s viability over the long haul. Gross margins are improving, but the company has yet to turn a profit.
Primo Water’s stock has taken a nosedive, losing roughly half its value so far this year. Meanwhile, business model cousin SodaStream enjoyed an 11% return during this same period, as did the NASDAQ Composite.
Primo Water’s expected revenues from its Flavorstation segment represent a very small amount of both its overall revenues and SodaStream’s total revenues. Primo’s long-term strategy involves integrating multiple purified water-based beverages -- including hot drink, carbonated, and flavored -- from a single Primo water dispenser for either home or office use. If the company can successfully pull this off, then maybe it’ll finally give SodaStream some viable competition, and give its income statement the shot in the arm it so desperately needs.
What to Watch For
Primo Water’s next earnings date release is August 6. Watch to see if this company meets future estimates, cleans up its shaky cash situation, and can finally generate positive cash flow. Stay tuned to see if it’ll start competing seriously in SodaStream’s playground, or if it continues to get trounced. In the meantime, I’m not ready to take a swig of Primo for my own portfolio.
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