COT

Publicly traded companies mentioned herein: Amazon.com Inc (AMZN), Costco Wholesale Corp (COST), Cott Corp (COT), Nestle SA (NESN SW)

Highlights

In the presenter’s opinion, Cott Corp (COT) is perceived to be a very steady fundamental compounder operating in a rational duopoly market (with Nestle). However, the presenter is short COT at this time due to recent due diligence on bottled water and the home and office delivery (HOD) space that suggest its relationship with Costco may become a headwind as Nestle appears to be squeezing Cott out (and undercutting it on price). These distribution businesses tend to have high incremental margins, and expansion via M&A in markets where the route density is high leads to solid growth. If Nestle’s presence in Cott’s key customer acquisition channel and growth markets has changed the competitive dynamics, then the leverage inherent in the business could magnify the downside risk. In the presenter’s opinion, Cott’s top line growth may stall (guidance for 2019 could disappoint), EBITDA could decline, and the multiple could contract. At ~8x his 2019 EBITDA forecast, the stock would be worth “a little over $9/share (~40% downside).”