Consumer stock Cott in powerful transformation

Headquartered in Mississauga, Ont., consumer goods stock Cott Corporation bottles and distributes retailer-brand beverages in North America and elsewhere. In addition to carbonated soft drinks, the company sells flavored waters, energy-related drinks, juice, juice-based products, bottled water and ready-to-drink teas. Cott mainly sells to grocery, drug store and convenience store chains, as well as to mass merchandisers and wholesalers.

Soft drink bottler Cott Corp. (TSX─BCB; NYSE─COT) continues to face challenges in the private-label sector, says Bill Schmitz, New York based managing director of Deutsche Bank Securities.

But he says the company is in the midst of a powerful transformation — one that apparently narrows its focus on both private-label and carbonated soft drinks.

Mr. Schmitz also sees Cott catching a higher valuation as it ramps up its production of sparkling water, energy drinks and mixers, while putting more emphasis on both water and coffee delivery. He also sees the company’s free cash flow gaining traction.

Consumer stock a value play in soft drink sector

Not surprisingly, Mr. Schmitz is continuing to uncap a “buy” recommendation for Cott, while sticking with his 12-month price target of $14 a share. He writes:

There are only a few value plays in the soft drink sector that we now consider compelling. And Cott is one of them.

So, we see Cott’s shares continuing to get a lift from its industry-leading yield on cash flow, its enhanced portfolio, as well as its debt to equity transfer.

Meanwhile, the company’s integration of Atlanta’s DSS Group, which it bought last November, appears to remain on track.

In addition, Cott apparently continues to be successful in moving away from selling large-pack carbonated soft drinks. The company also now enjoys considerable flexibility to make bolt-on acquisitions, given its stronger balance sheet. In addition, Cott can boast of having a strong pipeline of assets.

Acquisitions add to growth of this consumer goods stock

In the interim, the company has lined up $10-$20 million of acquisitions a year. In addition, its legacy business continues to chug along, while Cott retains significant capability for growing its contract manufacturing business.

Although the company is worried about higher promotional costs for its carbonated soft drinks, any decline thereof should continue to be offset by growth in contract manufacturing.

Moreover, thanks to more stable volumes, Cott’s gross margin is expected to rise over the two years. Margins should also get a lift from cost-cutting, with the company’s recently announced war on waste expected to save $30 million.

Thanks to both factors, Cott’s free cash flow is likely to top $100 million in 2015, provided the current business climate stays put.

In fact, we see free cash flow rising even further, as the company realizes synergies from its deals.

As a result, Cott’s ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) is expected to fall below 3.0 by 2018.


Investor’s Digest of Canada, MPL Communications Inc.
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