As Canadian stocks are about to end the seventh consecutive month on a positive note, investors are consistently seeking opportunities to gain from the ongoing market rally. While some fundamentally strong but cheap stocks rallied in August, not all of them look like they’re worth buying right now. In this article, I’ll highlight one of the top TSX gainers from August — Primo Water (TSX:PRMW)(NYSE:PRMW) — that I expect to post stronger gains in September 2021 and beyond.
Primo Water stock
Primo Water stock rose by nearly 9% in August against a nearly 1.5% rise in the TSX Composite Index. The company’s stronger-than-expected second-quarter results — released in the first week of August — could be the main reason for its sharp share price gains.
It’s a Florida-based water solutions firm that mainly focuses on delivering bottled water and water dispensers to homes and offices. While the company makes most of its revenue from the United States market, the United Kingdom and Canada are also among its other key markets.
Strong growth trend
In Q2, Primo’s revenue rose by 15% YoY (year over year) to US$526 million — higher than analysts’ estimates of US$505 million. With this, the company’s second-quarter adjusted earnings jumped to US$0.17 per share compared to only US$0.08 per share in the same quarter a year ago. Its adjusted net profit margin also expanded significantly to 5.2% in the last quarter from 1.9% in the previous quarter and 2.9% a year ago.
Primo’s management highlighted surging demand from residential customers and continued recovery in its commercial customer base as some of the key reasons that boosted its sales and profitability in the last quarter.
Raised full-year outlook
In the June quarter, Primo’s adjusted EBITDA rose by 20.6% YoY to US$ 99.5 million. After witnessing a strong sales and profit growth trend in the first half of the year, the company raised its full-year adjusted EBITDA outlook. Now, it expects its 2021 adjusted EBITDA to be between the range of US$390 and US$400 million, reflecting roughly 10% growth over the previous year.
I expect the company’s commercial customer base to continue showcasing a sharp recovery in the coming quarters amid reopening businesses and offices. This factor could keep its solid financial recovery trend intact going forward.
Another reason to buy this cheap TSX stock
Primo Water’s share price rose by just 12.5% last year after the COVID-19-related negative factors caused an 18.4% drop in its 2020 revenue. Despite gradual recovery in its sales and consistently positive earnings growth this year, its stock is still underperforming the broader market. In 2021 so far, the stock has risen by only 12.2% to $22.42 per share compared to more than an 18% rise in the TSX Composite benchmark.
Interestingly, the company has been beating Street analysts’ earnings expectations by a wide margin for the last seven quarters in a row. Given its stellar earnings growth trend and continued business recovery, I find its stock cheap. That’s another reason why I expect Primo Water stock to continue soaring and outperforming the broader market by a wide margin in the coming months after its rally started in August.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool has no position in any of the stocks mentioned. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.