Pass on Primo Water

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 |  About: Primo Water (PRMW)
by: Bill Simpson

This analysis of Primo Water (NASDAQ:PRMW) was provided to TradingIPOs subscribers in advance of its Thursday November 4th IPO. The company raised $100 million by offering 8.3 million shares at $12, the midpoint of its proposed range of $11-$13.

Primo Water (PRMW) offered 9.6 million shares at $12. Stifel (NYSE:SF) and BB&T (NYSE:BBT) led the deal. Janney Montgomery and Signal Hill co-managed. Post-IPO, PRMW has 19.1 million shares outstanding for a market cap of $229 at $12 per share. The bulk of the IPO proceeds will go to help pay for the Culligan Refill acquisition, the remainder to repay debt.

The Chairman, CEO and President Billy Prim owns 10% of PRMW post-IPO.

From the prospectus:

We are a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide.

This is a purified water company, selling those larger bottles you see in company water systems. There is an initial sale of water dispensers and then the company generates recurring revenues via sales of 3 and 5 gallon bottles of water. Empty bottles are exchanged at recycling center displays in retail outlets.

Exchange centers include Wal-Mart (NYSE:WMT), Lowe's (NYSE:LOW), Sam's Club, Costco (NASDAQ:COST), Target (NYSE:TGT), Kroger (NYSE:KR), Albertsons (NYSE:ABS) and Walgreens (WAG). The company has 7900 exchange locations nationwide. PRMW has done nice sales in their water bottles/exchange centers at major US retail locations. Looking at PRMW's margins I suspect that they were able to sell in their dispenser/exchange centers into so many large retailers by giving the retailers premium pricing. Iother words Wal-Mart and Lowes et al. are getting a chunk of PRMW's margins by allowing PRMW to locate with them. PRMW does note in the prospectus that they offer retailers 'attractive margins'.

PRMW believes dispenser owners consume 35 3-5 gallon bottles annually on average.

PRMW utilizes 55 independent bottlers and 27 independent distributors to service their retail network.

Acquisition - PRMW recently purchased Culligan's water filtration ansd store vending/refill business. Culligan operates in 4,500 retail locations. Total cost was $105 million. Customers of the Culligan Refill Business include Wal-Mart, Safeway, Meijer, Sobeys, Target, Hy-Vee and Kroger. In 2009 this business generated $26 million in revenues.

Revenues thru Lowes account for 33% of revenues, Sam's Club 19% and Wal-Mart 15%.

Same store sales have increased approximately 5% through the first nine months of 2010.

Management team took Blue Rhino public in 1998 through sale in 2004. Note that soon after the IPO, there were auditing issues with Blue Rhino due to extensive revenues derived from sales to inter-related party companies. In an article in early 1999, the WSJ questioned Blue Rhino's business practices. Blue Rhino's stock went from $13 pricing to $25 soon after ipo to $2 within a year. Blue Rhino did rebound and eventually sold to Ferrellgas for $17 a share in 2004. All in all, after the turmoil first year, Blue Rhino was a successful public company. Ipo market cap was $94 million in 1998, buyout market cap was $340 million in 2004.

PRMW's management team is using the same exchange business model here with water that they employed with propane at Blue Rhino.

Financials
- $11 million in net debt post-IPO. PRMW has never had an annual operational or net gain.

2010 - Pro forma (factoring in Culligan purchase) revenues actually look to dip slightly in 2010 as sales of PRMW's systems have dipped. Refills have increased in 2010, the actual systems have lagged though. Full year revenues should be $69 million, down 4% from 2009. Operating margins are negative, losses should be in the $0.10-$0.15 ballpark.

Conclusion
- Since operation commenced, PRMW has never been able to generate positive operating margins. The core business will show a revenue dip in 2010. PRMW blames this on inventory glut from 2009. Either way a company not generating growth and with consistent negative margins and debt on the books should not be generating a market cap 3 X's+ revenues. Yes there could be potential here if PRMW is successful in integrating the Culligan business in a cost-effective manner, however I'd rather wait and see than step in here on IPO. Pass.