Exchangeable water-system seller Primo Water (NAS: PRMW) left investors on ice Friday, after a 2-cent EPS miss and lowered 2012 guidance. The stock dropped more than 20%, falling as low as $2.07 before a mild recovery. Quarterly revenue was in line with expectations, at $22 million, a 73% increase from a year ago but actually a sequential decrease. The company lost nearly $7 million, or 30 cents per share (Non-GAAP loss was 10 cents), and shrinking margins and other problems beat the stock down further. In my earnings preview, I expressed three questions on investors' minds going into the report. Let's see how Primo stacked up:

  • Would gross margins improve? Gross margins had fallen in each of the last four quarters, all the way from 29.6% in Q4 2010 to 22.4% in Q4 2011. Investors were looking for a turnaround in this number but unfortunately they didn't get it, as it dropped all the way to 16.1%. Management addressed that concern on the earnings call, saying that margins were crunched from expediting FlavorStation, transitioning regional operators, and pursuing aggressive pricing. They believed that gross margin would improve by the second quarter and would stabilize in the mid-20s.
  • Any good news on FlavorStation? Rollout delays in FlavorStation had mostly destroyed any opportunity the new offering had to capitalize on the holiday season, and have been one of the major reasons Primo's stock has deflated; Investors had been highly anticipating the SodaStream (NAS: SODA) competitor. The product launched in over 500 Lowe's (NYS: LOW) stores in the past quarter, and management said Lowe's was pleased with its performance. The FlavorStation will roll out in additional Lowe's locations in Q2. Still, management is guiding FlavorStation sales in the range of only $15 million to $17 million for 2012, the bulk of which will come in the second half of the year. With numbers like that, it's unlikely to be a serious competitor to SodaStream -- which posted near $300 million in sales last year -- anytime soon.
  • Can they keep up with the strong guidance? Going into the earnings call, analysts had been projecting a $0.26 EPS, giving Primo a promising forward P/E of just 11. However, management unsurprisingly lowered guidance, saying it expects 2012 revenue in the range of $118 million to $126 million, an increase of 40% to 50%, and GAAP EPS of breakeven to $0.03 or Non-GAAP earnings of $0.07 to $0.12 per share. (Analysts tend to use Non-GAAP EPS.)

Foolish takeaway
The revised guidance is likely the culprit behind the stock's post-earnings dive. Still, at today's prices shares are trading at a P/S ratio of about 0.65, a level usually reserved for slow-growth, low-margin businesses. With a ratio like that, the upside potential certainly remains strong for Primo, and its FlavorStation is not the only product posing a threat to competitors. Unveiling a new Flex series of water dispensers with built-in single cup coffee brewers, CEO Billy Prim took the first shot across the bows of Green Mountain Coffee Roasters (NAS: GMCR) , maker of the Keurig, and Starbucks (NAS: SBUX) , which recently announced the launch of its own single-cup brewer, the Verismo. Thanks to Primo's nine-step filtering process, Prim said, users would be able to make the best-tasting coffee, and he cited a survey showing over 50% of consumers don't want to use unfiltered tap water for their java. The product should hit stores in the second half of the year.

With additional revenue streams from FlavorStation and the new coffee brewing system, Primo could be a steal at today's prices. I'm still hesitant after the recent rollout flops, however, and I'd like to see management improve margins and deliver on some of its promises before I buy in.

Our experts at the fool are always on the lookout for growth stories like Primo Water. There's actually a fast-growing Latin American retailer that our Chief Investment Officer called his top pick for the year. With just a market cap of $2 billion, it's got room to run, and its business model has been proven by other retailers you definitely know well. Check out our special report on the Fool's "Top Stock for 2012." All you have to do is click right here - it's free.

At the time this article was published Fool contributor Jeremy Bowman owns shares of SodaStream International but hold no other positions in the companies in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of SodaStream International, Starbucks, and Green Mountain Coffee Roasters; creating a lurking gator position in Green Mountain Coffee Roasters; writing covered calls on Starbucks; and writing covered calls on Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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rover10965

Primo is headed for the bottom..... their water business has never made money and never will.

March 19 2012 at 8:38 PM Report abuse rate up rate down Reply