Primo Earnings: Solid Start to 2023 Suggests Firm Is on Track To Meet Our Targets

Our $16 (CAD 21.50) per share valuation of no-moat Primo Water PRMW 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.

Revenue rose 4%, with Primo’s adjusted EBITDA margin expanding by 70 basis points (to 17.4%) as demand remained robust despite recent price increases. The company saw a 6% increase in dispenser sell-through (to 215,000 units), which is noteworthy as dispensers are the gateway to future water sales in a razor/blade business model. Management reaffirmed full-year guidance, still calling for $2.30 billion to $2.35 billion in revenue and $450 million to $470 million in adjusted EBITDA; our expectations are in the lower half of both ranges.

The company also announced an agreement with Legion Partners, appointing two new directors nominated by the activist fund. We believe the activist involvement can be beneficial in boosting accountability and infusing new ideas in a firm that has posted unremarkable low- to mid-single-digit returns on invested capital over the last five years. However, we note that Primo’s core water business is difficult to differentiate, leaving few evident opportunities for durable returns growth. Our capital allocation rating (Standard) should not change in response to the news.