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Primo Water Corp. (NYSE:PRMW ) offers bottled, spring, sparkling, and mineral water, along with water filtration equipment to both consumers and commercial customers. If you've ever seen a water jug refill machine at a local grocery store, there's a good chance it's a Primo product at one of 20,000 retail locations. Indeed, the company is a major business generating over $2 billion in revenue over the past year with overall solid fundamentals.

That being said, shares have been under pressure amid the broader market selloff while growth has slowed compared to what was a breakout year during the pandemic as consumers stocked up on home beverages. We like the stock at the current level with a sense that shares have been unjustifiably punished and underappreciated by the market. The company recently reported its latest quarterly results which beat expectations, supporting a positive long-term outlook. PRMW's defensive and consumer staples profile is positive in the current market environment. A trend of climbing earnings can send shares higher going forward.

PRMW Q2 earnings came in with a non-GAAP EPS of $0.21, which beat the consensus by $0.04. Revenue of $571 million, up 9% year-over-year, was $22 million ahead of estimates. The company did report a GAAP net loss of $23 million although this includes the impact of $29 million in impairment charges, exiting the Russian market considering the geopolitical circumstances. Nevertheless, the takeaway here is the underlying business is growing and profitable, generating $20.8 million of free cash flow during the quarter.

A development for Primo has been the exit of the "single-use bottled water retail business", which was announced back in Q4 2021 to improve margins along with citing environmental benefits. Management explains that on a comparable basis, revenue climbed by an even stronger 16% y/y highlighting the early success of the strategy.

Indeed, the gross margin reached 58.2% compared to 56.5% in the period last year, driven by pricing initiatives and the sales shift including momentum in the Water Direct segment. This part of the business based on the 5-gallon reusable jugs for home and business delivery has been a growth driver, up 20% in Q2 adding 75k customers, and 20% higher revenue y/y revenue growth.

Despite inflationary cost pressures, among higher labor and transportation expenses, adjusted EBITDA at $108 million climbed by 9% y/y. The operational strength was worldwide, including the business in Europe which currently represents about 25% of total sales, climbing 22% y/y on a constant currency basis.

Primo ended the quarter with $98.5 million in cash against $1.5 billion in total debt. Considering $400 million adjusted EBITDA over the past year, the reported net leverage ratio of 3.6x is stable in our opinion, consistent with the business model. Management expects that level to trend down towards 2.5x by 2024.

Within the current guidance, the company is targeting revenue growth between 12% and 14% this year and adjusted EBITDA right around $420 million. By 2024, the forecast is for annual high single-digit organic revenue growth while adjusted EBITDA may approach $525 million with an upside to the operating margin.

Keep in mind that PRMW pays a quarterly dividend of $0.07 that yields about 2% on a forward basis. In our view, PRMW offers a high-quality dividend with room for annual rate increases in line with earnings going forward.

The attraction in Primo, which was previously known as "Cott Corp" before a name change in 2020, comes down to its leadership position in bottled water solutions. Even with all indications municipal "tap" water is safe to drink in most cities, the trend globally has been an increasing appetite among consumers for filtered and spring water alternatives.

In essence, Primo is turning one of the world's most abundant resources into gold with a steady growth outlook. Just in the United States, 7 million households utilize the large format "dispensers" with an addressable market estimated to be 29 million. Primo, for its part, sold 225k dispensers in Q2 which naturally creates a growing installed customer base through what is effectively a subscription model. This is bottled water as-a-service.

According to company data, the bottled water industry has nearly doubled over the past decade with a history of demand being resilient during different economic cycles. This is important considering the current environment of high inflation and macro uncertainty. The upside here is that Primo Water Direct at home and business delivery are unlikely to cancel their water service, or at least it would be far back in line compared to other discretionary categories. The relatively low volatility of the sales outlook is a strong point in the company's investment profile.

As it relates to valuation, the metric we're looking at is an EV to forward EBITDA multiple of 8.7x against the $3.7 billion in enterprise value and the 2022 adjusted EBITDA guidance of $420 million. In our view, this is an attractive level for a company with double-digit organic revenue growth and a path to firming profitability.

The company competes with typically smaller local and fragmented bottled water distributors along with larger global corporations that are more diversified into other types of beverages, like The Coca-Cola Company (KO), PepsiCo Inc (PEP), and Nestle (OTCPK:NSRGY). There are also companies like Xylem Inc (XYL) that focus more on industrial-scale water filtration systems and equipment. Investors could also look at purified water utilities like the York Water Company (YORW) and American Water Works (AWK). While these companies are not directly comparable, it's fair to say that PRMW trades at a discount, particularly in the consumer staples sector.

We rate PRMW as a buy with a price target for the year ahead at $18.00 representing an 11x multiple on the 2022 adjusted EBITDA guidance in terms of the implied enterprise value.

The bullish case for Primo is that the company can continue to generate positive financial trends alongside operating momentum with an upside to current estimates. Notably, this is a level the stock traded at in late 2021 and we see room to reclaim that high. A break above $14.50 over the next few months can confirm more positive momentum. On the downside, we can view the $12.50 cycle low as an area of important support.

In terms of risk, weaker-than-expected results over the next few quarters could open the door for another leg lower. The adjusted EBITDA margin along with results from its Water Direct segment are key monitoring points.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PRMW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.