Small-Cap Throwdown: Primo Water Corporation (PRMW) Analysis

Steve Kanaval |

Equities.com’s Small-Cap Throwdown is a brand new investment newsletter focused on finding the best underdog stocks you haven’t heard about. It is authored by Wall Street veteran and notorious straight shooter Steve Kanaval in his distinctive style. In each issue, readers can expect Steve to comb through a no-holds-barred melee between a hand-picked group of feisty welterweight title contenders to determine their industry’s king of the ring. The first issue of Equities.com Small-Cap Throwdown pits the hottest beverage small-cap stocks against each other to find a winner. Here's Steve's take on Primo Water Corporation (PRMW) .

About the Company:

Primo Water Corporation (PRMW) , together with its subsidiaries, provides multi-gallon purified bottled water, self-service refill water, and water dispensers in the United States and Canada. The company operates in two segments, Primo Water and Primo Dispensers. The Primo Water segment offers exchange and refill services through point of purchase display racks, or self-serve filtered water displays and recycling centers. The Primo Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water and services are offered at approximately 24,600 combined retail locations.

Why I Like the Stock:

The retail water market is a growing industry, specifically at the retail level, and this will not be ending anytime soon. I like the fact that shares are above the $6 level and look like they want to stay there. Shares of Primo Water started the year at $4.30, it’s up nearly 50% so far. I fully expect shares to be up 100% or more this time next year. Management is sitting on sales growth and even with a soft quarter, shares rallied, which is an indication that they are undervalued. The company sells to grocery stores and retail outlets, and I’m sure you have passed by these without knowing that they were from Primo Water. The private-label business is a high-margin area that they can grow quickly.

Look at the basic YTD chart for PRMW:

PRMW.jpg

Primo has fought back from the 2011 sell-off and battled back to be a legitimate small-cap stock in 2015. Technically, the stock looks great and investors are pretty sticky for this stock. It’s important to watch the profitability here as internal spending can vary quarter to quarter, affecting margins and profitability.

At a current $150M valuation, Primo Water is undervalued by more than $100M. Once the trading world discovers the multiples for this sector, they will take a harder look at water companies in general as part of the beverage industry and companies like these will benefit for the realization that water is the beverage of the future and will finally become the commodity it deserves to be.

What Can Go Wrong in 2015:

The company lost $3.5 million on $30 million in revenue for Q4 2014 and this spending trend cannot continue. Shareholders will not stand for internal spending on executives or marketing and will demand execution. Beyond the execution concerns, I am worried about shares rising too fast, and 30% in a quarter is good for the stock. The problem is, once you get up 50% or 100%, volatility in a thinly traded stock can be a huge concern because you invite short sellers, which every stock has. The concern is that you are toggling the valuation with any large swings, and since adding new "first-time" investors will be important for Primo Water, it’s important to remember that sticky investors dislike large swings.

Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PRMW Primo Water Corporation 12.52 -0.02 -0.16 61,000

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