#10 COT 1q earnings review

Going to make a quick comment after a 2min review of the COT earnings release:

Cott reported earnings this morning, reporting EPS of $0.23 and soundly beating consensus estimates of a loss of $0.05. The conference call is 90min away (and we'll probably have to read a transcript later), but the news looks very good so far. We had hoped that Cott might be profitable at a pace of just $0.10 per quarter and they more than doubled that. So what happened? In short, North American volumes were way up (thank you recession for giving us more private label soda drinkers), which in turn drove 13.5% gross margins (whereas we are at 9.5% for the year). SG&A was higher than we would have expected since, according to our notes, the guidance was for $65m in annual SG&A and this quarter SG&A was $35m (you can see our prior post on COT to get an idea of the model we had). Nonetheless, the beat on volumes and GMs more than offset higher SG&A. Again, we don't have the benefit of the conf call comments, but on paper, this was a very good quarter. As we've mentioned before, the best quarters of the year are over the summer months, whereas the calendar 1q is typically a slower quarter. We hope management will be cautiously optimistic in telling us things can get even better.

How good can things get is something we can only speculate on at this point. Most if not all sellside analyst reports I had seen expected a loss for the year. Based on today's earnings and the historical seasonal pattern of earnings, a $0.75 annual EPS number may not be crazy. This would depend however on no cola price war breaking out over the summer. If we haircut this to $0.50 (to be conservative), COT even at $2.50 (we expect it to trade up today), would be trading at a 5x p/e. This compares to 10x-12x for bottlers like CCE, PBG etc. Thus, I think this stock could be a double from here even on conservative numbers (if you give a 10x multiple on $0.50 in earnings), and on an optimistic scenario the stock could get to $8 (8x multiple on a potential of $1.00 in eps). So we have a long ways to go upside wise I hope. So far we have made 4x on our initial investment (where we bought the shares at $0.60 in early March)--not so bad!

PS: BTW, you might think we are crzy to think COT can get to $8 from $0.60 where we bought it...but just for a frame of reference, the stock has traded over $30 pre-05 and the average price in 2005-2007 was around $15. Not saying it gets back up there, but relatively speaking $8 may not be so crazy.

PPS: We are definitely, 100% going to sell before it even gets close to $8. This is a value/misunderstood story play, not a get greedy on eps and p/e multiple expansion play.