Investment Thesis: Our analysis of Primo Water (NYSE:PRMW) supports a Buy rating for the stock. We are confident in this recommendation due to the company’s significant shift towards becoming a leader in water solutions, along with improvements in its operational and financial profile, and its current undervaluation. Despite previous macro headwinds, strong growth in the company’s Q3 earnings has reinforced our positive sentiment. We also consider the appointment of a new CEO to be a positive development and believe it will contribute to the company’s continued growth.
Another Strong Quarter: Primo Water reported a strong Q3 with revenues increasing by 6% YoY to $622 million. The company largely met consensus estimates and demonstrated strong growth in its North American and ROW segments. Additionally, gross margins improved by 250 bps YoY to 62.1%, and the company’s adjusted EBITDA margin exceeded consensus estimates.
Divestment of International Business: Primo Water’s decision to divest the majority of its international business to Culligan International for $575 million demonstrates a successful strategic move. Not only did the company realize an attractive valuation for this divestment, but it also plans to use the proceeds to pay down debt and increase share repurchases, positioning itself for long-term growth and sustainability.
Guidance Slightly Disappointing: While the company’s Q3 performance exceeded expectations, its guidance for Q4 was slightly lower than anticipated. We believe this conservatism in guidance may be related to the recent changes in management and potential impacts from the divestment of the international business.
Valuation: Primo Water continues to trade at a discount compared to its peers and its historical average, presenting an attractive investment opportunity. Our analysis supports a target price of $18 based on an EV/EBITDA valuation of 9.3x, in line with historical averages.
Risks to Rating: Our analysis acknowledges potential risks, including macro challenges impacting demand, adverse FX movements, and execution challenges. While these risks are important to consider, we believe the company’s strong performance and strategic changes position it well for continued growth.
Final Thoughts: Primo Water’s ongoing transformation, strengthened by the divestment of its international business and the appointment of a new CEO, reinforces our confidence in a Buy rating with a target price of $18. As the company continues its focus on the North American market, we see significant potential for long-term growth and value for investors.
