COT - Cott Corporation

[bmichaud]

This is an interesting idea, not mine originally (an independent research firm not located on Wall Street) but figured I'd run it past board members anyway.

 

Cott is the largest private label drink manufacturer in the US and has significant operations in the UK as well. In August 2010 it completed its purchase of Cliffstar, the largest PL fruit juice manufacturer in the US. The purchase diversified COT away from the highly competitive CSD market - ~60pc of revenue pre-Cliffstar, ~45pc post - to the more fragmented fruit juice market - 5pc pre and 35pc post. COT's key competitive advantage, and why I am most interested in the business (as I have learned from Buffett/Munger the importance of scale) is its extensive manufacturing footprint, which allows it to respond rapidly to changes in consumer trends by introducing new SKUs customized for its customer's needs. COT typically prices its products at a 35pc discount to national brands, thus when the Nats raise prices COT is able to follow suit. However, if the Nats run promotions, COT is exposed to input cost inflation bc it cannot raise prices independent from a Nat price hike.

 

Most importantly, 2012e FCF to equity is ~$1.50 per share and COT currently sells for ~$7.93, or 5.3x. There is not much growth so I derive a FV of $12.40 via a 12pc cost of equity and the above FCF ps estimate. COT does carry a decent amount of debt at ~3x EBITDA maturing beyond five years but does not pay a dividend and will be focused on paying down debt.

 

Disclosure: I have not yet established a position.

[Laxputs]

Seems like there are a lot of these "cheap on fcf basis, in a downturn, (levered)" ideas out there. 8x EV/EBITDA so not that cheap. Interesting article nonetheless.

 

http://seekingalpha.com/article/2364295-cott-headline-miss-masks-underlying-improvement-100-plus-percent-upside

[glorysk87]

Has anyone looked at COT recently? The story has evolved since the last post - the company made a couple acquisitions again to diversify the business, this time entering the HOD (home office delivery) business, delivering water, coffee, and some other commodity-like items to homes and offices.

 

The gist of the thesis is that the acquisitions reduced Cott's reliance on the secularly-declining private label business, offering more sustainable higher-margin revenue streams. They intend on delevering over the next few years and squeezing synergies out of recent acquisitions, which should drive relatively healthy increases in FCF. Long term the plan is to do a bunch of tuck-ins (~$25mm a year) to consolidate the very fragmented HOD business. Each tuck-in should be nicely accretive as it improves route density and thus margins.

 

Pretty simple thesis. However, I'm not sure why the market is still assigning such a steep discount to the name. It's not like the market is misunderstanding the story - consensus number reflect the thesis pretty cleanly. Am I missing something? This seems like a open and shut investment. But I can't wrap my head around why the market is still keeping this at a suppressed valuation.