Cott Corporation: Value Idea With Cheap Optionality

Updated on

By Alex Gavrish, Etalon Investment Research; and author of “Wall Street Back To Basics

Company profile

Cott Corporation (NYSE:COT) is one of the world’s largest producers of beverages on behalf of retailers, brand owners and distributors. Cott Corporation (NYSE:COT) produces multiple types of beverages in a variety of packaging formats and sizes, including carbonated soft drinks, 100% shelf stable juice and juice-based products, clear, still and sparkling flavored waters, energy products, sports products, new age beverages, and ready-to-drink teas, as well as alcoholic beverages for brand owners.

Cott Corporation (NYSE:COT) operates manufacturing facilities in the United States, Canada, the United Kingdom and Mexico.  Cott also develops and manufactures beverage concentrates which it exports to over 50 countries around the world.

Hedge fund firm discloses stake

In November 2013, hedge fund management firm Levin Capital Strategies LP disclosed a 5.3% stake in the company. Based on the latest filing on January 31st, 2014 by the hedge fund firm, it owned a 5.4% stake valued at approximately $41 million dollars. According to a recent article published by, the hedge fund shareholder believes that there is a possibility of a leveraged buyout or another strategic alternative. The report also mentions that the company confirmed in a February 5th 2014 statement that it had hired Credit Suisse Group AG (NYSE:CS) to evaluate strategic alternatives.

Valuation and upside potential


As of February 10th, 2014 close, Cott Corporation (NYSE:COT) had a market capitalization of $754 million and an enterprise value of $1,234 million. For the full fiscal 2012 year, the company generated $2,251 mil in revenues, $110 mil in operating income, $173 mil in cash flow from operations and $88 mil in free cash flow. In terms of valuation, company is currently trading at an EV/EBITDA multiple of x5.9 (based on 2012 financials), P/S ratio of x0.33, P/E multiple of x15.8, and has a free cash flow yield of about 12% percent. During 2013, Cott paid $0.23 per share in dividends which equals to an annual dividend yield of 2.9%. Company has also spent $13 million on share repurchases during first nine months of 2013 which equals to a buyback yield of about 1.7%. If judged by EV/EBITDA multiple alone, current valuation is certainly attractive compared to other beverage manufacturers that trade at much higher multiples.

Long optionality concept

In my recently published book Wall Street Back To Basics, I discuss the concept of “long optionality” in equity investments. The technique is widely used by the most successful professional investors and hedge funds. The main idea of the approach is to combine a fundamentally sound and attractive investment opportunity with a “lottery ticket”. Joshua Friedman, co-chief at Canyon Partners, an investment management firm with which manages $23 billion in assets spoke at one of the investment conferences and mentioned optionality idea. He argued that investors need to not only buy cheap assets but also to invest in assets where you get optionality cheaply.

In the case of Cott Corporation (NYSE:COT), conservative valuation and recent stock underperformance can provide a fundamentally sound and attractive investment opportunity while a possible leveraged buyout or other strategic alternative might provide the cheap “lottery ticket” to investors.


Leave a Comment