Morgan Stanley: Cott Delivers a Beat

Cott shares beat both Wall Street’s and investment bank Morgan Stanley’s quarterly earnings forecast yesterday by a wide margin on better than expected gross margins.

The private-label soft drink maker also announced a $35 million share repurchase program — about 6 percent of outstanding shares — over the next year.

Excerpts from report by Morgan Stanley analyst Dara Mohsenian are below, including this incredible note: Cott trades at only 5 times earnings — well below most of its peers.


What’s New: Contrary to market (and our) concern, Cott delivered better than expected Q1 EPS of $0.06 vs. the $0.02 consensus and our ($0.01) forecast. With revenue 3% below consensus, much better than expected gross margin (12.1% vs. 11.0% consensus) drove 6% gross profit and 8% operating profit upside vs. consensus. Cott also announced a $35M share repurchase program over the next 12 months (~6% shares outstanding), which should be well received by investors. While we await management’s commentary on FY12 gross margins, given market (and our) worries heading into the print, the stock should be up nicely today.

Strong 1Q pricing drove gross margin, but hurt volume: 1Q revenues came in 3% below the Street, as strong pricing (as well as juice weakness and pack water\losses) resulted in a filled beverage case volume decline of 7% (MS flat) driven by NA weakness (-8% vs. MS -2%). UK filled beverage case volume came in 1.3% below our forecast although largely owed to higher than expected pricing. Pricing actions drove better than expected operating margins in both NA (4.2% vs. MS 2.7%) and the UK (3.2% vs. MS 1.2%), which drove the operating profit upside in the quarter. Balance sheet and cash flow results were relatively in line with our expectations.

Equal-weight investment thesis: While we await further commentary on the call, we are encouraged by Cott’s 1Q results and believe that management has taken the right steps to restore profit margins in FY12, albeit at the expense of volumes. Cott trades at 5.0 times EV/C2013e EBITDA, which is at the very low end of its global beverage peers.