Company Reports

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.

As a pure-play water provider, Primo Water has built a solid product portfolio and manufacturing and distribution footprint to tap rising demand for better-quality drinking water in North America. However, we remain skeptical that the firm benefits from any durable competitive edge based on brand intangibles or cost advantages, given the lack of differentiation and intense local competition in the water category. As such, we have assigned a no-moat rating to the firm.

Considering a strong finish to fiscal 2023 and an enhanced margin profile from the sale of a significant portion of its international business (about 24% of fiscal 2022 revenue), we plan to raise our USD 16.10 and CAD 21.70 fair value estimates for no-moat Primo by a high-single-digit percentage. With shares trading near the range we’d consider fairly valued, we recommend investors await a wider margin of safety.

As a pure-play water provider, Primo Water has built a solid product portfolio and manufacturing and distribution footprint to tap rising demand for better-quality drinking water in North America and Europe. However, we remain skeptical that the firm benefits from any durable competitive edge based on brand intangibles or cost advantages, given the lack of differentiation and intense local competition in the water category. As such, we have assigned a no-moat rating to the firm.

No-moat Primo Water’s share price popped 10% today after the firm announced a planned sale of the bulk of its struggling international operations for $575 million in cash (scheduled to close by the end of 2023), with plans to dispose the remainder in 2024. We view this as a prudent move allowing management to sharpen its focus on the healthy North America business, reduce leverage (to its stated long-term target of 2.5 times net debt to EBITDA), diversify into water adjacencies via acquisitions, and return cash to shareholders through buybacks. Revenue will likely fall in the near term as a result, but we expect the impact will be mitigated on the bottom line by cost savings from a smaller operational footprint.

We are trimming our fair value estimate for Primo Water to $15.70 and CAD 20.90 (from $16.20 and CAD 22), which implies a 19 times multiple against our 2024 earnings estimate. The decline is driven by trimmed annual sales growth assumptions over the next five years to 5.0% (from 5.5%), reflecting normalized demand from pandemic levels, and by a 160-basis-point reduction in operating margin estimates to an average of 9.9% (from 11.3%) to incorporate higher labor and fuel costs. Primo Water shares are moderately undervalued, trading at an 11% discount to our intrinsic valuation, but we suggest investors wait for a wider margin of safety before buying into this name.

As a pure-play water provider, Primo Water has built a solid product portfolio and manufacturing and distribution footprint to tap rising demand for better-quality drinking water in North America and Europe. That said, we remain skeptical that the firm benefits from any durable competitive edge based on brand intangibles or cost advantages, given the lack of differentiation and intense local competition in the water category. As such, we have assigned a no-moat rating to the firm.

We are not planning any material changes to our $16.20 (CAD 22) fair value estimate for Primo after absorbing second-quarter results that met our projections, with sales up 4% and EPS at $0.13. We are maintaining our 2023 forecasts for $2.35 billion in sales and $465 million in adjusted EBITDA, in line with management guidance, and we see no reason to alter our 10-year estimates for mid-single-digit sales growth and 10% average operating margins. Shares trade in a range we’d consider fairly valued.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages (those that can be stored at room temperature) in 2010 to an all-things-water business in 2020. The current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business. Now that it is a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages (those that can be stored at room temperature) in 2010 to an all-things-water business in 2020. The current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business. Now that it is a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

Our $16 (CAD 21.50) per share valuation of no-moat Primo Water should not change much after the firm announced first-quarter earnings that suggest it is poised to meet our full-year targets. Our view is somewhat more favorable than the shares’ mid-single-digit percentage swoon in trading after the news was announced, which we believe is likely on account of modestly overinflated views of Primo’s near-term prospects (our $0.75 adjusted diluted EPS forecast for 2023 was modestly below analyst consensus prior to the announcement). We see little reason to change our long-term forecast materially (mid-single-digit percentage top-line growth, low-20s adjusted EBITDA margin, on average, over the next five years) and see the shares as somewhat attractive, as prevailing sentiment appears to be overly focused on near-term turbulence.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages (those that can be stored at room temperature) in 2010 to an all-things-water business in 2020. The current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business. Now that it is a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

Although no-moat Primo Water’s mixed fiscal 2022 fourth-quarter results initially sent the shares down 5%, we think the market is overly fixated on near-term economic turbulence. Given that the firm’s fiscal 2023 outlook ($2.3 billion-$2.35 billion in revenue and $450 million-$470 million in adjusted EBITDA) already aligns with our forecast ($2.3 billion and $458 million, respectively), we don’t plan to materially alter our $21.50 fair value estimate. Shares now trade at a roughly 27% discount to our existing intrinsic valuation, offering a compelling buying opportunity.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages (those that can be stored at room temperature) in 2010 to an all-things-water business in 2020. The current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business. Now that it is a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

Similar to the shares’ trading reaction after quarterly results were announced, our $16 (CAD 20.50) per share valuation of no-moat Primo Water should rise by a mid-single-digit percentage, reflecting third-quarter earnings that have the firm trending above our full-year targets. Our long-term estimates remain intact (mid-single-digit percentage annual revenue growth, roughly 20% adjusted EBITDA margins). We see the shares as somewhat attractive, as prevailing sentiment appears to be overly focused on near-term economic turbulence.

Our $16 (CAD 20.50) per share valuation of Primo Water should rise by a mid-single-digit percentage (similar to the trading price’s reaction) after it posted strong second-quarter earnings. The firm appears to be on pace to meet our long-term expectations (mid-single-digit percentage annual revenue growth, roughly 20% adjusted EBITDA margins). At current levels, the shares seem attractive, with market sentiment seemingly overly focused on the impact of near-term economic turbulence.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages, or those that can be stored at room temperature, in 2010 to an all-things-water business in 2020. Nevertheless, the current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business, and as a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

We do not plan to alter our $17 (CAD 21.50) per share valuation of no-moat Primo Water much after it posted first-quarter results consistent with our near- and long-term outlooks. With indications that pricing and staffing actions are proceeding well, the company should be able to weather the inflationary environment, although we continue to believe it has limited avenues to stem long-term competition considering the commodity nature of its core product. At current levels, the shares seem attractive.

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages, or those that can be stored at room temperature, in 2010 to an all-things-water business in 2020. Nevertheless, the current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business, and as a pure-play water provider, we expect a more robust top-line trajectory and a structurally improved margin profile.

Our $17.50 (CAD 22.50) per share valuation of no-moat Primo Water should slide by a low- to mid-single-digit percentage because of the firm’s fourth-quarter earnings announcement, with the company missing our full-year sales and profitability targets (the rescission of our prior expectation of a U.S. corporate tax rate increase should offset some of the impact). The revenue softness was mostly attributable to the water refill and filtration business (which consists of refill stations at retail locations, around 10% of sales) and transitory freight and other supply chain cost pressures were more of a burden on costs than anticipated. So, we still expect that the company is on track to post roughly $500 million in annual adjusted EBITDA by the end of 2024.