1. Blue Hen Investment Club Consumer Staples
Equity Research Oct. 20, 2015
Rating Company
Buy Primo Water Corp. (PRMW)
United States GICS Sector
Winston-Salem, NC Consumer Goods - Beverages
Investment Highlights
Business Description
Primo Water Corporation(PRMW) is a companyseparated into twolarge segments- one
segment sells the physical water dispensers, and theydealwiththe marketing, design,
and inspection ofthe dispensers primarily. The other segment offers refill services.
These servicesinclude exchange centers (where you canexchange your emptydispenser
for a full one), and“fill-it-yourself” centers (where you canbring your empty dispenser
and refill it). There are almost 50,000 of these exchange and fill-it-yourself centers
across the U.S. Primo Water Corp. was started in 2004, and it is headquartered in
Winston-Salem, North Carolina.
Focus on Innovation and Product Design Improvements
A major theme that Primo Water Corp. constantlytalks about is their modern designof
the actual dispensers, as well as their ideas for innovationinthe future. Most water
dispensers we see nowadays inthe home, workplace, etc. are rather bland. They
typicallyhave white or greybases andhold a giant jug of water at the top (whichis often
difficult to replace due to the heavyweight of the jug). Primo Water dispensers are
dividedintotwo series:“Home” and“Pro”. The Home series consists of 12 different
models that varyin qualityanddesign, as well as price. The higher-endhome series
models cost up to $200- theyare partlymetal and partyplastic, andhave a slicksilver
and blackappearance. Theyare also“bottom-loading”, whichmeans there is no ugly
and inconvenient jugyou must loadontop of the machine everytime you runout of
water. The lower-endhome series models do have a visible jug, andsome are “top-
loading” while some are made to fit nicelyon a countertop. These lower endmodelsare
blandand boring looking like other water dispensers tendto be- but theyare verycheap,
startingat just $12.99. Although these lessexpensive dispensers are not proprietaryand
do not have muchvisual appeal, theygive a cheaper option for consumers whowant to
spend less, preventing the companyfrom becoming a high-endbrandonly. The Pro-
seriesdispensers are definitely the more unique products. While theyare stillrelatively
affordable (max. $299.99), theycome withseveralfeatures that make them much more
than just a water dispenser. Some of these features include self-cleaning, attachments
that work with Keurig products, and evena built-incoffee brewer that canbrew both
hot and coldcoffee. The proseriesmodels are allsilver & black, partlymetal, andlook
much more luxurious than the typical white/greydispenser witha jug ontop.
High Growth Potential
Our club often prefers to buymid to large capstocks because theytendto be less riskyandmore stable inthe long run. However, small-capstocks
like PRMW canbe a blessingindisguise. First off, successful smallcap companies generallyhave aneasier time increasingrevenue. It wouldbe
very difficult for a large companylike Apple to double their revenue, because theyalreadymake so much moneyandare exposedto almost the
entire consumer base. A smaller companylike Primo Water Corp. is not currentlyexposedto the average consumer, soifthe companydoes
become more recognizable inthe future, there is a lot more roomfor growth. As long as theycontinue to market their products effectively, they
should see their sales revenue increase in coming years, because there reallyaren’t manyother companies I’ve foundwhocan provide drinking
water to people onsucha large scale, withlittle to no effort from the consumer. In terms of PRMW as a security, small capstocks alsohave much
less analyst coverage, whichoftencauses these types of companies to be overlooked. This cangive an advantage to investors byallowing them to
purchase the stock before the rest ofthe market realizes the companyis a goodbuy.
Universityof Delaware
CFA Research Team
Price on Oct. 20, 2015 9.00
Price Target 12.00
52-week Range 3.60-9.31
Return
(%)
1m 6m 12m
Absolute 19.11% 43.33% 57.56%
Sector 4.68% 1.18% 9.13%
White – Revenue (3yr): $32.4M
Brown – Operating Income (3yr): 1.26
Blue – Cash from Ops (3yr): 6.5M

2. Blue Hen Investment Club Consumer Staples
Equity Research
Industry Analysis
Between its two segments, PRMW is affected by a couple different factors, including
productions costs (especiallythe cost of plastic), as well as the movement towards healthy
living styles, and a clean environment in addition.
Healthy Living
The first big factor in the drinking water industry I’d like to discuss is the movement of
Americans towards a healthier lifestyle in recent years. According to an article from
TheAtlantic.com written in 2013, consumers drank over 50% more water than they did ten
years prior. This is not due to anincreasedoverall thirstiness aroundthe country- consumers
are just drinking muchmore water andmuchless soft drinks as more people become aware of
the healthbenefits ofbeing fullyhydrated, as well as the health risks of drinking sugary soft
drinks ona dailybasis. As America continues thishealthiness trend, we can expect bottled
water and drinking water distribution companies see steadily increasing revenue.
Plastic Prices Increasing
Like other jugs of water, Primo Water’s jugs are made frompolycarbonate plastic.
Unfortunately, the price ofthis type of plastic has beensteadilyincreasing throughout 2015.
This is an increasedcost for the company- inthe past 12 months, their cost of goods and
services is at a record high, just under $87 million. However, it seems as thoughtheir revenue
is followingthe same pattern. Also at a recordhigh, their revenue in the past 12 months is
$117.6 million. Thistellsus that the companyis stilldoingwell as it hasbeen able to generate
more revenue alongwiththeir higher costs.
Environmental Factors
Another trend inthis industryand most of the market as a whole in recent years is the idea of
being environmentallyfriendlywhenever possible. While most people whodrinkbottledwater buysmaller products (often16.9 oz., sometimes 1
liter sized) these bottles are actuallyverybadfor the environment. They are made from a plastic called PET which can take thousands and
thousands ofyears to biodegrade if not in the proper setting. Unfortunately, even though recycling takes away some of this problem, it is
estimatedthat only15-30% of water bottles are actuallyrecycled. The other 70-85% of these bottles endupinlandfills, or evenworse, the ocean-
where theyoftenkill over a millionsea creatures in a year due to the industrial chemical BPA beingreleased upon the begin ning of PET plastic
biodegrading. Since Primohas “fillit yourself” centers andexchange centers, their one, two, three, andfive gallon jugs are all reused, and do not
end up in landfills or the ocean, harming the environment. Just fillingup one 5-gallonjug alone (640 fluid oz.) wouldsave almost thirty-eight 16.9
oz. water bottles. Ifwe assume about 20% of these get recycled, that’s savingabout 31 water bottles frombeing dumpedintooceans andlandfills-
and that’s just filling the jug a single time.
Competitive Landscape
Although these firms are considered
Primo’s closest competitors, they do not
have very similar business models. Nestle
and Coca-Cola distribute water bottles
(Nestle Water & Dasani Water) but do not
sell physical water dispensers or 3-5 gallon
water jugs that make Primo’s water system
so convenient to consumers. National
Beverage Corp. and Dr. Pepper do not
even sell water products- they are similar
to Primo Water Corp. only because they
distribute soft-beverages to consumers on
a large scale. There are not many
companies I’ve found that are as large as
Primo Water that do exactly what they do.
Rival Firms Industry Competitive Positioning
Nestle
Packaged Food
& Non-Alcoholic
Beverages
More well-known brand, better
access to financial and other
recourses. Less-water distribution
than Primo Water Corp.
National
Beverage Corp.
Holding
Company –
Beverage
Products
Wide Variety of Products, However
they do not sell or distribute any
type of drinking water
Coca-Cola
Company
Non-Alcoholic
Beverages
Again a wider variety of products &
much more commonly known brand
than Primo Water. More distribution
sources as well
Dr. Pepper
Snapple Group
Inc.
Non-Alcoholic
Beverages
DPS has no water products, but like
Coca-Cola, has more distribution
means than Primo
Ticker: PRMW
Market Cap: 214.1M
Shares Outstanding: 25.2M
Beta: .77
Dividend: none
Exchange: Nasdaq
Headquarters: Winston-Salem,NC
Employees: 120
Management:
- Billy D. Prim,Chairman/CEO/Founder
- Matthew T. Sheehan,President/COO
- Mark Castaneda,CFO
Major Shareholders:
- Billy D. Prim:9.56%
- Zelman Capital LLC:7.65%
- Wynnefield Capital Mgmt: 7.6%
- Manatuck Hill Partners:6.86%
- Akre Capital Mgmt: 6.86%
- Wellington Mgmt Group: 4.8%

3. Porter’s Five Forces
Threat of New
Entrants
Threat of Substitutes
Bargaining Power of
Suppliers
Bargaining Power of
Buyers
Rivalry Within the
Industry
MODERATE
Other dispenser
companies can
improve designs of
dispensers or make
water refilling even
easier, but Primo
already has their
brand name out there
and has contracts
with huge companies
such as Walmart
HIGH
Many areas in the
U.S. have drinkable
tap water. This is an
obvious substitute for
anyone that wants to
save money and
considers the water
dispensers
discretionary
spending.
MODERATE
In terms of the cost of
water, suppliers do
not have much pull.
There are tons of
water companies out
there and water is a
natural resource that
is easy to obtain, so if
one water company
raises prices there
are plenty of
alternative places to
buy water from at a
reasonable price.
However, the plastic
used to make the
dispensers often
fluctuates in price,
which is why the
suppliers of Primo do
at least have some
bargaining power.
LOW
Primo Water is
already very cheap
and saves
consumers tons of
money on buying
smaller plastic water
bottles constantly.
Any consumers that
want to spend less on
money will simply be
drinking tap water
and wouldn’t be a
Primo customer in
the first place.
Otherwise,
consumers using
Primo Water do not
have much power
because there aren’t
many other cheaper
options in the
drinking water
industry to switch to.
LOW
I consider this to be
extremely low- there
really are no
companies out there
that distribute water
to so many people
with such a large
amount of exchange
and fill-it-yourself
centers available. As
I discussed, there is
definitely a moderate
threat that a new
company could
eventually breach this
area, but currently
nobody as done
nearly as well as
Primo.
SWOT Analysis
Strengths Weaknesses Opportunities Threats
- relatively well-known in
terms of water distribution
- strong emphasis on
improving overall design of
products
- cheaper prices than most
competitors
- Not a well-known
company relative to
Consumer Staples Industry
- Not many direct
competitors- hard to value
- Movement towards
environmentally friendly
companies
- Increased capital allows
for more expansion
- Other larger, well-known
drinking water brands such
as Deer Park, Poland
Spring, and Nestle
Competitive Positioning
Relationships with Stable, Well-known Companies
Primo Water Corp. distributes water inseveral large retail, grocery, department, drug, mass merchant, and hardware stores. They have major
accounts withLowe’s Home Improvement, Home Depot, Ace Hardware, Walmart, Kmart, Meijer, Kroger, FoodLion, Safeway, Sobeys, Sam’s Club,
Costco, Walgreens, and Office Depot. Of these major accounts, in2014 Walmart accounted for 40% of these net sales, andLowe’s brought in 22%.
These relationships with big-name, stable companies are a great sign for the future. If Primo distributed water primarily through smaller
companies, it wouldbe riskybecause these companies couldmuchmore easilyfail, whichwouldleave Primo wasting valuable ti me trying to find
new sources of distribution. Knowing that these large companies are fine andwillnot immediatelyshut down anytime soon, it’s one less thing
that we have to worryabout affecting net sales. Alternatively, it is mildlyconcerning that Walmart has so much pullwith Primo Water Corp. Since
theyaccount for a large amount ofPrimo’s net sales, I’d like to see Primotryand find alternate sources of income in coming years just in case
anything happens to the Walmart contract.
Distribution on a Large Scale
The competitionsectionof the most recentlyreleased10-Kfor Primo Water Corp. discusses the company’s distributionadvantages over other non-
alcoholic beverage companies. It is the company’s belief that theydo have some direct competitionin thisindustry- but most of these companies

4. do not focus ondistributing water on such a wide scale. For instance- their primarycompetitor inthe U.S. is Nestle. Nestle is a much larger and
more establishedcompany& brand, but theyonlyoffer water distributionservicesincertainregions ofthe U.S, despite the much smaller Primo
Water Corp. offering these services nationally. Primo believes that other direct competitors do not have the same quality of MIS tools and
bottling/distribution techniques to offer the large scale of services that they can.
Compatibility with Well-known Products
One big advantage the PrimoDispenser segment hasover other dispenser companies is their products’ compatibility with products from well -
known brands. In2014, theydeveloped a new water dispenser calledthe “hTRIO”. This newdispenser has multiple uses, andallows customers to
attach Keurig K-Cuptechnology, with whichtheycan brewhot or coldcoffee, tea, hot chocolate, and even cider. Although the technology to
change temperature of water in the dispenser is nothingnew, andother dispensers have also developed coffee attachments of their own-I believe
being ableto use the Keurig brand (whichis one ofthe biggest brands inhomemade coffee) in compatibility with Primo’s dispensers is a very
unique feature that canbe developedintoeven better ideasinthe future. WithKeurig’s patents ontheir products, thisalso bars other dispensers
from making similar attachments without a contractual agreement with Keurig. Primoalsohas a contractual agreement with a foreign company
called Sparkling Drink System Innovation Center LTD, that distributes several carbonated beverage products in countries such as Italy,
Belgium, France, Australia, and Northern parts of Africa. Through cross-distribution and licensing agreements, Sparkling Drink System
Innovation Center LTD distributes Primo Water products outside the U.S., and Primo Water Corp. uses Sparkling Drink System In novation
Center LTD technology in their dispensers to give them exposure to consumers in the U.S. and Canada.
Financials
Revenue: Over the past fiscal year, revenue is up10% from the previous year, andthe previous year was up almost 17% from the year be fore
that. Gross Profit hasalso seena huge increase of over 35% since the end of the 2013 fiscal year. This is a goodsign, because the companyhas
become more efficient in terms of profit, despite the cost of polycarbonate increasingrecently. If the trendtowards healthyliving and
environmentally-friendlyproducts continuesincoming years, I believe Primo willcontinue to see upward trends in bothrevenue andgross profit.
The water distributionindustryis not at all saturatedcurrently- in fact, Primo Water Corp. believes that theyhave onlypenetrateda bout 5% of
households withwater dispensers. Althoughwater distributionmaynot be the most popular formof drinking water currently, there is a lot of
room for growth inthisarea due to the movements towards being healthier andhaving a clean environment that I just mentioned.
Segmentation: Primo Water Corp. has two different segments, one that sellsand distributesthe actual water, and one that takes care of the
design and sellingof the physical dispensers. Looking intothe company’s financial statements, we see a very different breakup of revenue by
segment thanwe did a few years back. In2011 only28.4% of revenue came fromwater sales, while 70.7% of revenue came from the sale ofactual
dispensers. Over the past 3 years, the revenue % for water has increasedand the revenue % for dispensers has seena decline. For the 2014 fiscal
year, the water segment nowis responsible for 67.1% of revenue with the dispensers segment on ly bringing in the other 32.9%. Water only
brought in7% of the total operating income for 2011, with dispensers obtainingthe remaining93%- but the 2014 year shows the water segment
being responsible for 94% of the operating income andthe dispensers have onlybrought in 6% of total operating income for th e year. At first
glance this could be a badsign- it appears to indicate that there are not a lot of dispensers being soldto new consumers. However, if we look at
the physical numbers rather thanpercentages, it actuallyshows a steadygrowth indispenser sales, andwater sales have simplyskyrocketedwhich
is whytheyaccount for most ofthe company’s revenue nowadays. Since Primohas beenincreasingtheir grossprofit marginin recent years, this
suggests that the water segment maybe more profitable for them, a ndit alsomayexplainwhyrisingpolycarbonate plastic costs have not really
affected Primo’s bottom line.
Cash: Primo Water Corp. had verylow amounts of cash onhandinthe past. Their balance sheet shows a lack of anycashor cashequivalents at
all at the endof the 2009 fiscalyear. Theydidstart to accumulate some cash, withthe account showing$800,000 for the 2011 fi scal year- but this
wouldsoon decrease again, showing $200,000, $400,000, and $500,000 for the years 2012, 2013, and 2014 respectively. As I discussedinthe
Revenue sectionabove, Primo has seen a huge increase inrevenue inthe past twoyears- whichhas helpedaccumulate more cashthantheyhave
had at anypoint since their Q2 earnings report backin2011. Theyreported$2.8 millionincashandcashequivalents for Q2 this year, whichthey
are planning onpartlyusing to increase the amount of service locations aroundthe U.S. and Canada.
Debt/Capital Structure: In recent years, PrimoWater Corp. has seen increasing long term debt. Thisis due to a yearlyterm loantheytake out
everyJune, which theyuse to “refinance working capital” andoftenuse to payoffother debts that are due. This is concern ing to me, because the
more loans theytake out, the more their long termdebt willsteadilyincrease over time. However, iftheycontinue the steepincreasesinincome,
hopefullytheycanstart to payoff some of the debt without takingout large loans everyyear that rack upinterest. In terms of Capital Structure,
their debt to equityratiois 83.5%- but this is down almost 10% since June 2015, whichis a goodsignfor the future, and hopefullysuggests theywill
beginfinancingmore operations withequityrather than debt.
Operating Margins: I believe PrimoWater Corp.’s operating margins over the past 5 years show a great upward trend. Although the operating
margins were -15% in2010, theyhave increased significantlyeveryyear since then. (2011: -11.48%. 2012: -8.1%. 2013: -3.99%. 2014:-1.65%). If
this trendcontinues as it shouldwithincreasingrevenue, bythe endof the fiscal year I expect them to have a positive operating margin, andin
turn, start to make a profit everyyear fromnowon.