Trade Of The Week

Unusual Cott Corp (COT) Bulls Position for Summer Rebound

Date: 3/13/17

Stock: COT

Trade Details:

Cott Corp (COT) saw bullish buying of more than 2,450 August $12.50 calls for $1.10 to $1.15, more than 10X average volume with IV30 rising all day. These call options are 51 delta, 12 gamma, and negative theta as time decay will impact the position. They are profitable above $13.60-$13.65 at expiration which his over 150 days away.

The $1.7B soft drink company trades 25.85X earnings, 0.53X sales, and 1.96X book with a 1.95% yield. COT is expecting low-single digit revenue growth to over $3.8B by 2018 and turning to profitability this year with 45% growth expected over the next five years. Cott focuses on bottling and distributing private-label soft-drinks, energy drinks, and juices including brands such as Vess, Red Rain, and Harvest Classic. The company has been shifting their business model towards more water, coffee, tea and sparkling water which has moved from 19% of sales in 2014 to 68% in 2016. Coffee/water especially are helping generate more top-line growth and using some smaller tuck-in deals in N. America and Europe which are building value. The company bought Eden Springs and S&D Coffee which are generating $23M in synergies. COT has also diversified their channel distribution from over 73% private label retail to now just 27% PLR and 10% branded retail, 34% HOD water, and more in foodservice and convenience retailing.  They also have a strong DS services business with 72% coming from water delivery. They bought Canada’s Acquaterra in 2016 which expands the company’s footprint with synergies expected to be phased in 2017-2019. COT is FCF strong up to $150M in 2016, rising from $107M in 2014. They’re a bit leveraged at 4X right now with a long-term target to reach a net leverage target of 3X by 2019. COT will be at the Jefferies 2017 Global Consumer Conference in June.

Analysts have an average target for shares of $17.60 with 6 buy ratings and 4 hold ratings, RBC out recently with a $20 price target and Canaccord a Street High at $21. The firm thinks their deal for Eden Springs is a significant game-changer which will shift their focus away from the heavy reliance on a declining beverage categories into one focused on better margins and higher growth. Institutional ownership rose 6.5% last quarter, Levin Capital buying more than 5.9M shares, now their fifth largest position, and P2 Capital buying an additional 2.6M shares. Short interest is 1.75% of the float.

On the chart, shares are breaking out of a three month range above $12 with a measured target to $14. Shares are back above cloud resistance and their major moving averages. COT broke a downtrend from the August highs in March and the 50% Fibonacci of the move is back to $13.60.

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