Primo Water Finally Shows Signs of Life

Primo Water (NAS: PRMW) just can't find a way to win. Shares were down another 4% yesterday after the company posted an earnings beat but a top-line miss. Despite the continuing decline, there's good news for investors to be found here.

In my earnings preview, I brought up three concerns for Primo Water. Let's see how the water distributor stacked up:

Gross margins: Primo's margins had compressed in each of the last four quarters, dropping all the way to 16.1% in Q4 2011, but the company managed to pump the percentage back up to 25.9% in the first quarter. Higher prices were a key factor in the margin improvement, and CEO Billy Prim said the remaining balance of the price increases would take effect by June 1.

Cash flow: Though management didn't release a Statement of Cash Flows, they reported that operating cash flows were positive, which represents a dramatic improvement over the previous quarter's -$8.8 million in OCF. The company also posted positive EBITDA of $134,000.

Still, Primo's recent financing arrangement with Comvest Capital underscores its shaky cash position, as does its cash balance of just $379,000 at the end of the quarter. The water distributor agreed to borrow $15.15 million from Comvest at a 14% interest rate, and issued the lender a warrant to purchase 1,600,000 shares at an exercise price of $2.30. If exercised, those shares would dilute the stock by about 7%. Prim said he found this option preferable over diluting the stock with a secondary offering.

Estimates: The company posted a $0.05 EPS loss on expectations of an $0.08 loss while revenues of $19.8 million fell short of the estimated $20.63 million, which represented 15.4% top-line growth from a year ago. For a company that was once hailed as a growth story, that's a pretty tepid increase, but I'll give management credit for maintaining its outlook. Primo's now projecting revenue between $118 million and $126 million for the year, or a 40% to 50% increase, and a non-GAAP profit of $0.03 to $0.08 a share for 2012. If management can deliver on those numbers, this stock could be well headed for a turnaround.

In addition to its exchangeable water business, Primo plans to distribute its at-home soda maker, Flavorstation, to 500 more Lowe's (NYS: LOW) locations this year. Flavorstation had been a major reason for the stock's lofty price last year, as investors were interested in getting a piece of the SodaStream International (NAS: SODA) competitor. Just yesterday, SodaStream proved the strength of the DIY soda market when it smashed estimates with revenue clocking up a full 50%. While Primo's only projecting $15 million to $17 million in Flavorstation sales this year, some industry observers believe its distribution relationship with Wal-Mart (NYS: WMT) is a big win, but on Wednesday SodaStream just announced a distribution agreement with the world's largest retailer as well.

While Primo's recent financing arrangement shows that it's still struggling to get on both feet, the company appears to have finally put the mistakes of the past year behind it. If management can hit its goals for the rest of the year, the stock could easily make a jump out of the bargain basement price it sits at today.

If you're feeling frustrated with Primo's returns, I recommend checking out a company that our chief investment officer named as his Top Stock for 2012. It's a retailer in an emerging market using a proven business model, and it just reached a new 52-week high. But with an expected 20% growth rate, it's got plenty of room to move up. Get your copy of this free report now before it's gone for good. All you have to do is click right here.

Editor's note: A prior version of this article mentioned Primo Water's distribution agreement with Wal-Mart as a potential advantage over Sodastream. The article has been updated to reflect the recent announcement of Sodastream's plans to distribute through Wal-Mart as well.

At the time thisarticle was published Fool contributor Jeremy Bowman owns shares of Primo Water and SodaStream International. The Motley Fool owns shares of SodaStream International. Motley Fool newsletter services have recommended buying shares of SodaStream International. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores and writing covered calls on Lowe's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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