Primo Water Earnings: Volume and Margin Gains on Customer Acquisition Efforts and Cost Control

We plan to tick up our $17.10 and CAD 23.20 fair value estimates for no-moat Primo Water by a low-single-digit percentage after digesting its first-quarter results. Sales rose 9.6% on a balanced mix of volume (5.1%) and pricing (4.5%), suggesting its investments in multichannel customer acquisition and retention are paying off. Meanwhile, operating margins expanded 270 basis points to 7.9% on improved efficiencies in production and water delivery and better expense leverage. While we remain concerned about the long-term prospects for Primo Water given the lack of differentiation in water, we think the disposal of its struggling European operations has enabled the firm to sharpen its focus on more profitable North America. In that region, we expect a closer collaboration with major retailers, coupled with refreshed digital initiatives, which should help drive up demand for water dispensers and delivery services among households and small businesses in the coming quarters. As such, we are ticking up our 2024 sales and profit estimates by a low-single-digit rate to align with the firm's updated outlook. Our 10-year projections for mid-single digit sales CAGR and low-teen average operating margin remain in place. Shares look overvalued.