Primo Water (PRMW) Reports Q3 Results
Primo Water (PRMW) reported solid Q3 results last night. Revenue of $35.5 million (up 4.8%) was $770,000 better than expected while EPS of $0.13 (up 44.4%) beat by $0.05. These results were better than management’s own guidance, and prompted it to raise full-year 2016 revenue guidance to $133.2 to $134.4 million. Sales in the Water Segment (gross margin of 38.2%) were up 7%, driven by 8.1% growth in Exchange and 5.4% growth in Refill. Dispenser sales (gross margin of 11.4%) were up 13.4% to a record 166,000 units, which implies continued growth in recurring Water Segment sales. Primo added 300 net locations (mainly Wal-Marts in the U.S. and Canada), bringing new locations this year up to 1,900. Total locations are now around 26,600 (19,000 water and 7,600 dispenser). Gross margin was up to 31.2% from 28.1%, and Charles Norris from Glacier Water has joined Primo’s Board of Directors, as has Matt Sheehan, Primo’s President and COO.
Billy Prim spoke about the acquisition of Glacier Water. He didn’t go into a ton of detail given that it hasn’t closed yet. But he did say that growth in cash flow “will facilitate rapid debt reduction,” that Primo will hold an Analyst Call to review financial projections once the transaction closes (which should be by year-end) and that upon closing, the company will be able to market outdoor water refill stations. I think this last point is a significant growth opportunity since self-serve refill at all hours of the day fits perfectly into the lives of consumers. Total locations post-acquisition will jump from 26,600 to around 46,000, and management sees the runway leading to 50,000 to 60,000 within five years given its belief that it can continue to add 1,500 to 2,000 per year. Primo’s current water business is roughly two-thirds exchange and one-third refill. Once the acquisition is complete, that mix will flip to roughly two-thirds refill and one-third exchange (Glacier brings in a lot of refill locations). There will likely be a lot of cross-selling opportunities given that many Glacier refill locations don’t have exchange, but easily could.
The bottom line is that it was another good quarter and the acquisition looks to be on track. There’s ample reason to continue to own the stock. Shares are down modestly today, which I attribute to non-company specific concerns. Continue to hold. Shares are trading just above their 50-day moving average (at 12.75), and if the market really falls apart, they could easily move back to 12 (6% lower than today), where they were prior to the announcement that Primo would acquire Glacier. That wouldn’t be ideal, but in the context of a long-term investment, it wouldn’t be overly concerning. HOLD.
In Other News
The broad market doesn’t look great. Our stocks that reported last week—LogMeIn (LOGM), Mindbody (MB) and LeMaitre Vascular (LMAT)—are holding up well, which is a good sign. Other positions, namely USA Technologies (USAT) and Mitek (MITK) are looking weak.
USA Technologies (USAT) just broke through its 200-day moving average today, and I haven’t been able to uncover any new news on the stock. It could easily be that a few hedge funds are raising capital by selling the stock, but I don’t know. It could also be a heck of a good buying opportunity, given that the company will report earnings next Wednesday. In any event, it’s a trying time to be a shareholder. I’m not ready to throw in the towel yet, however, especially given that USA Tech’s management and Board of Directors has been under pressure from at least one activist investor (Legion Partners) to improve profitability and evaluate strategic alternatives. Given that this news only became public in October, after the stock hit a high of 5.80 (part of the previous rally could have been due to activist investors acquiring shares), it seems to me that the current pullback reflects uncertainty, but not a lack of company value. The stock has always been prone to big pullbacks. Let’s hold on for now, and give it more time to repeat its previous ability to rally out of them. If you’re an aggressive investor, I think the stock is a buy right now. For those that are more conservative, just hold. HOLD.