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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (215)  | Author's Website |

Activists Involved With Primo Water

Primo Water is the largest water dispenser in the US. Activist hedge fund Legion Partners is getting involved

December 05, 2018 | About:

Primo Water Corp. (PRMW) is the largest water dispenser in the U.S. Its Primo, Glacier and Culligan water dispensers are found in Walmart, Home Depot, Lowe’s and many other grocery stores. The stock went public in 2010 and at one point, traded at less than a dollar a share. But recently, activist hedge fund Legion Partners ramped up its ownership.

You can see by looking at the numbers why activists have become involved. Sales have grown to $286 million in 2017 from $106 million in 2014. Over that time frame, net income has improved to a loss of $6.4 million from a loss of $13.5 million. 

Free cash flow was a $3 million loss last year and a $3.75 million loss the year before. The balance sheet shows $5.6 million in cash and $23.5 million in receivables. The liability side shows $27.3 million in payables and $189.2 million in debt. The company has a lot of debt, especially since free cash flow has been negative.

Management does have an estimated Ebitda margin target of 20.3% for 2018. If Primo can accomplish this, it will help the cause. Management has also given guidance on sales of $303 million to $307 million for fiscal 2018. Its Ebitda guidance is in the range of $61 million to $63 million.

Primo stock trades for $14.48 per share, there are 38.54 million shares, and the market cap is $558 million. Its loss per share for the most recent quarter totaled $1.50. The stock pays no dividend.

Primo is the No. 1 water dispenser in the U.S, and it bought Culligan in 2010, and DSW and Glacier in 2014. The company sells the big, five-gallon jugs seen at grocery stores. In an investor presentation, management showed where Primo has its water dispensers located. Twenty-nine percent were in Wal-Mart, 10% Lowe’s, 10% Home Depot and 51% in other stores in the U.S. Some of the other major stores include: Meijer, Kroger, Food Lion, HEB, Grocery, Sobeys, Circle K, Family Dollar, Walgreens, Albertsons, Publix and CVS.

Primo’s locations do three things: refill, exchange and dispense water. Last year, the Refill division earned $173.2 million in sales and $47.1 million in operating income, Exchange $72 million in sales and $21.4 million in operating income, and Dispense $40 million in sales and $3.5 million in operating income. The first two categories can be quite profitable.

At this time last year, Primo had 33.5 million shares. Therefore, management has offered new shares to fund its growth by M&A. The company went public in 2010 at close to where the stock is trading now. Six years ago, the stock traded at less than a buck a share. It would have been nice to buy back then. 

Anytime I look at a retail stock, my first question is, “How is it affected by Amazon?” I do not see that these companies above have been affected like Sears and J.C. Penney have been. It seems that grocery stores are holding their own, which is good for Primo. And, Primo’s water dispensers are available on Amazon.

In a shareholder broadcast, management noted that several thousand machines can now take credit and debit cards. It seems unusual that it took them this long to decide to do this. Management also noted that its machines can notify the company when they are not working, in real time.

What got me interested in Primo was a 13G filing by activist hedge fund Legion Partners. Legion, which has had much success working with small caps, has taken a 6.14% holding.

But is the stock a buy for investors? There are clearly some merits. If Ebitda is $61 million and the stock trades at 10 times Ebitda, the stock would appreciate by 9%. The stock might do well as long as management does not issue more shares through M&A. They are probably better off integrating all of these new companies, focusing on profitability and paying down debt.

Disclosure: We do not own shares.

About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

Visit Holmes Osborne, CFA's Website


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