Value Investors: Follow This 1 Stock NOW!

Cott Corporation is currently trading above its intrinsic value. A market contraction could make it an attractive buy for a TFSA or RRSP!

| More on:
Businessmen teamwork brainstorming meeting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Cott (TSX:BCB)(NYSE:COT) is a water, coffee, tea, extracts and filtration service company with a national presence in the North American and European home and office delivery industry for bottled water, custom coffee roasting, iced tea blending, and extract solutions for the U.S. foodservice industry.

The company reaches over 2.5 million customers or delivery points across North American and Europe. Cott reports a market capitalization of $1.82 billion with a 52-week low of $11.72 and a 52-week high of $15.92.

Intrinsic price

Based on my calculations, using a discounted cash flow valuation model, I determined that Cott has an intrinsic value of $16.49 per share. Assuming less-than-average industry growth, the intrinsic value would be $15.71 per share, and higher-than-average industry growth would result in an intrinsic value of $17.35 per share.

At the current share price of $17.40, I believe Cott is slightly overvalued. Investors looking to add a foodservice company to their TFSA or RRSP should follow Cott stock through 2020, as a market contraction could push the share price below intrinsic value, which presents an opportunity to buy.

Cott has an enterprise value of $3.564 billion, which represents the theoretical price a buyer would pay for all of Cott’s outstanding shares plus its debt. One of the things to note about Cott is its leverage, with debt at 36.4% of total capital versus equity at 63.6% of total capital.

Financial highlights

For the nine months ended September 28, 2019, the company reported a strong balance sheet with US$265 million in retained earnings (down slightly from US$300 million as at December 29, 2018). Cott reports cash and equivalents of US$144 million with current portion of long-term debt of US$139 million, which means the company has enough cash on hand to cover its short-term debt obligations.

I am very pleased that the company has enough cash on hand to cover its short-term debt obligations, as this indicates fiscal responsibility on the part of management.

Overall revenues are up materially to US$1.794 billion, from US$1.774 billion in 2018 (+1.2%), which is complemented by a lower cost of goods sold year over year for gross profits of US$922 million (gross profit margin of 51.4%). Pre-tax income for the year of US$5 million, down from US$29 million in 2018.

I am a bit concerned about the company’s interest expense, which amounted to US$59 million in 2019 (3% of revenues), as this is money that could be used to grow the business.

In February 2019, the company sold all of the outstanding equity of Cott Beverages LLC, which operated the soft drink concentrate production business for proceeds of US$50 million, whereby a US$6 million loss was recorded on the deal.

The company exercised its normal course issuer bid during this period with share repurchases of US$31 million, which were subsequently cancelled. This is down from US$46 million of share repurchases in 2018. This is a strategy used by management to indicate it believes the current share price is undervalued.

Foolish takeaway

Investors looking to buy shares of a foodservice business should add Cott to their TFSA or RRSP watchlist. With positive retained earnings, increasing revenues, and an adept management team, Cott is poised to deliver significant value to its investors in the near future.

At its current share price of $17.40, I believe Cott is trading above its intrinsic value of $16.49 per share, which is why I advise investors to follow the stock into 2020 and wait for an opportunity to buy shares at a discount.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

More on Investing

edit Sale sign, value, discount

3 Cheap TSX Stocks to Buy Before July

Canadian markets have bounced back, but investors can still snag undervalued TSX stocks like Finning International Inc. (TSX:FTT).

Read more »


Is Blackline (TSX:BLN) Stock Worth Your Attention in 2022?

Blackline Safety Corp. (TSX:BLN) stock has struggled in the year-over-year period, but there are some positives to glean from its…

Read more »

stock analysis

Why I’m Buying the Dip in Andlauer (TSX:AND) Stock

Andlauer Healthcare Group Inc. (TSX:AND) stock offered exposure to two promising spaces while offering solid value in late June.

Read more »

clock time
Tech Stocks

Now’s the Time to Load Up the TFSA With These 2 Top TSX Stocks

Here are two top TSX stocks that long-term growth investors may not want to give up on, especially at these…

Read more »

data analyze research
Energy Stocks

TSX Stock Picks With Huge Potential

If you want a TSX stock that's bound for even more strong growth, these three are top picks by analysts.

Read more »

growing plant shoots on stacked coins

Market Plunge: Double Your Cash With 3 Bargain Stocks

These TSX stocks have corrected over 50%, despite their strong fundamentals, and could easily double from here.

Read more »

oil and natural gas
Energy Stocks

Can Cenovus Stock Outperform in H2 2022?

Is now the time for investors in Cenovus (TSX:CVE)(NYSE:CVE) stock to buy more, or wait out this volatility right now?

Read more »

cup of cappuccino with a sad face

The Biggest Regret a TSX Investor Can Have

Hydro One (TSX:H) is a top bond proxy to own if you're a TSX investor who's worried about a pick-up…

Read more »