There are several stocks with huge potential that investors might miss, and Primo Water Corp. (PRMW, Financial) is one of them.
The company has provided excellent quarterly results, including a 6.14% and 8.23% increase in net sales for the second quarter and six months. Further, Primo Water’s adjusted EBITDA for the second quarter increased 39.05%.
Primo Water began its journey in 2004 and is North America's leading single source provider of multigallon purified bottled water, self-service refill water and water dispensers sold through retailers in the U.S. and Canada (as of June, Primo Water has 26,300 locations). The company has introduced innovative, stylish and high quality dispensers that blow the competition out of the water. Primo Water has over 60 locations nationwide for bottling and uses a nine-step purification process to produce 99.99% pure, great tasting water.
Primo Water’s operating segments are:
- Water.
- Dispensers.
Strong second-quarter results
This North Carolina-based company reported its financial results for the second quarter on Aug. 2. Net sales increased 6.14% to $34.39 million compared to $32.4 million for the comparable prior-year period. Gross profit increased 27.23% to $10.42 million compared to $8.19 million for the same period last year. Further, Primo Water’s gross profit margin increased to 30.3% compared to 25.29% for the year-ago quarter.
Operating income for the reported quarter increased 119.84% to $2.77 million compared to $1.26 million for the comparable prior-year period. Primo Water’s net income shoots up 210.96% to $2.27 million compared to $730,000 for the prior-year period. Further, the company’s pro forma net income from continuing operations increased 126.76% to $3.22 million compared to $1.42 million in the year ago quarter.
Diluted EPS for the reported quarter was 8 cents compared to 3 cents for the same period last year. Primo Water’s selling, general and administrative expenses increased 9.89% to $4.78 million compared to $4.35 million for the comparable prior-year period.
Primo Water reported EBITDA of $5.19 million, an increase of 39.14%, compared to $3.73 million in the year-ago quarter. Further, adjusted EBITDA increased 39.05% to $6.16 million compared to $4.43 million for the comparable prior-year period.
Primo Water ended the quarter with cash and cash equivalents of $1.56 million and long-term debt of $16.01 million (a decrease of 19.55% compared to $19.90 million for the comparable prior-year period).
A glimpse into six months performance
Metrics | Six months ended June 30 | Six months ended June 30, 2015 | % change |
Net sales | $66.68 million | $61.61 million | 8.23% |
Gross profit | $19.76 million | $15.85 million | 24.67% |
Gross profit margin | 29.63% | 25.73% | --- |
Operating income | $4.28 million | $1.58 million | 170.89% |
Net income | $3.30 million | $0.49 million | 573.47% |
Pro forma net income from continuing operations | $5.22 million | $1.94 million | 169.07% |
Diluted EPS | $0.11 | $0.02 | 450% |
Selling, general and administrative expenses | $9.81 million | $9.01 million | 8.88% |
EBITDA | $9.11 million | $6.63 million | 37.41% |
Adjusted EBITDA | $11.08 million | $8.1 million | 36.79% |
Net cash from operating activities | $7.79 million | $8.52 million | (8.57)% |
Segments’ performance
Water segment’s net sales increased 9.81% to $24.28 million and 9.10% to $46.66 million for the reported quarter and half year, compared to $22.11 million and $42.77 million for the comparable prior-year period. Income from operations increased 30.15% to $8.72 million and 25.38% to $16.45 million for the reported quarter and half year compared to $6.7 million and $13.12 million for the comparable prior-year period.
Dispensers segments net sales decreased 1.85% to $10.10 million and increased 6.26% to $20.02 million for the reported quarter and half year compared to $10.29 million and $18.84 million for the comparable prior-year period. Income from operations increased 33.9% to $790,000 and 60.87% to $1.48 million for the reported quarter and half year compared to $590,000 and $920,000 for the comparable prior-year period.
Projections
Based on the recent performance, Primo Water has raised its outlook and expects its third quarter net sales of $33.9 million to $34.9 million and adjusted EBITDA of $5.9 million to $6.3 million.
For fiscal 2016, Primo Water expects the following:
- Net sales in the range of $132.2 million to $134.3 million.
- Adjusted EBITDA in the range of $21.9 million to $22.6 million.
- Water segment sales growth is expected to be in the range of 8% to 10%.
- Dispenser unit sales growth is expected to be in the range of 8% to 10%.
- The company expects free cash flow in the range of $7.0 million to $10.0 million.
- Capital expenditure is expected to be in the range of $10.0 million to $12.0 million.
- Interest expense will be approximately $2.0 million.
Long-term targets
Primo Water’s five-year targets are provided in the following chart.
Metrics | Targets |
Revenue growth | 7%-15% |
Gross profit % of net revenue | 30%-35% |
Adjusted selling, general and administrative expenses % of net revenue | 10%-12% |
Adjusted EBITDA margin | 17%-20% |
Growth strategy
- To drive unit economics – This will help to increase return on investment, and will improve the gross margins.
- To increase retail outlets.
- To improve connectivity –Â This includes improved communications and expanded reach in social and digital media.
- To grow household penetration of dispensers.
A peek into the water industry
People are more health conscious and are shifting their preferences from carbonated soft drinks to bottled water. From 2009 to 2014, bottled water consumption increased 23% and sales of bottled water in 2014 grew to $13 billion. Further, from 2009 to 2014, consumption of carbonated soft drinks decreased 12%. Water represents approximately 32% of total beverage consumption, and this has paved the way for Primo Water to spread its wings. Additionally, as per bevindustry.com, in 2015, the U.S. bottled water market grew 6.4%.
(Source: Company website)
On a concluding note
Overall, Primo Water is a rock-solid company with solid financial performance, proven executive track record, strong growth prospects with operating scale and established enviable customer base.
From 2013 to the second quarter, Primo Water’s net revenue and adjusted EBITDA as a percentage of net revenue grew at a CAGR of 10% and 25%. Finally, with the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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