This Stock Has Stalled and Might Not Recover Soon

Cott (PRMW -0.16%)produces and sells over 200 different types of beverages in over 50 countries, and it implements a highly effective strategy. Cott is what is known as a Fast Follower, which makes it unique to other beverage companies. 

Strategy and operation
As a Fast Follower, Cott will copy a beverage industry product that is performing well and alter it to meet the company's marketing approach. This strategy tends to be highly effective, simply because it's based on proven results. It's also a strategy that Cott wants to rely on in an economic environment where the consumer is weak. In this environment, it would be very risky to rely on innovation. If a new product failed, it could potentially significantly hurt Cott's top and bottom lines. Since the consumer isn't strong at the moment, it would be more difficult for the company to recover than in normal economic environments.

Cott is also a low-margin operation. Therefore, it's sensitive to cost structure fluctuations. This especially pertains to ingredient and packaging costs, which are affected by commodity trends in aluminum, sugar, corn, and more. Commodity costs are likely to come down when quantitative-easing ends or is tapered, but no one knows when that will be. However, it's likely to happen sooner rather than later, which is a potential positive for Cott. On the other hand, once QE is tapered or ends and excess liquidity is removed from the system, the global economy will be without a big support it once relied on. It's possible that demand for almost all products and services will fall.

Lastly, given the size of many components of the retail sector, Cott is heavily reliant on a few key retail players, particularly Wal-Mart. For instance, in the first half of 2013, 30.7% of Cott's revenue came via Wal-Mart. This can be looked at in several ways. One, if this deal were to fall through for some reason, it would be devastating for Cott. However, that's not likely. Two, if QE ends (or is tapered) and demand falls, then it would be logical to think that more consumers will opt for a value-based shopping destination Wal-Mart. That said, Wal-Mart recently warned that it was seeing signs of a slowing consumer. Therefore, either more consumers are shopping at dollar stores and/or online, or they're simply not spending as much money now. The latter is more likely. When a company like Cott sells discretionary items, this is a negative.

Negative trends
In the first half of the year, Cott's revenue dropped 7% to $811.3 million versus the first half of 2012. Gross margin fell to 12.4% from 13.5% of revenue. Lower volume was the key culprit.

For example, beverage case volume plummeted 8.7%, mostly due to declining carbonated soft drink and water sales in North America, and poor weather in the U.K. and Canada.

If you're looking for more specific numbers, then consider second quarter trends. North America case volume came in at 157 million versus 182 million in the year-ago quarter, U.K./Europe case volume was 50 million versus 52 million in the year-ago quarter, and Mexico case volume was 5 million versus 7 million in the year-ago quarter.

While Cott produces and sells bottled water, ready-to-drink teas, juices, energy drinks, and sports drinks, it still relies heavily on carbonated soft drinks. Therefore, Cott faces two major headwinds that tie into one another. One is the weak consumer. The other is a more health-conscious consumer. It's very possible (perhaps even likely) that Cott will alter its strategy to cater to consumer desires, which would improve its potential. At the moment, consumer trends are working against Cott. For now, Cott is seeing slight increases in average price per case in an attempt to make up for lower volumes, but it hasn't been enough.

Cott vs. peers
Keep in mind that comparing the following companies is like comparing a kindergartener's cognitive and athletic abilities to that of Division I scholar athletes. Nonetheless, these companies are in the same industry. It comes down to whether you want growth potential or a safer investment. 

Due to its industry, retail beverages, Cott is often compared to all-mighty Coca-Cola (KO 1.43%) and often underappreciated PepsiCo (PEP 1.22%). The latter is often underappreciated because not many retail investors are aware of its dominance in the snack category, which makes it more diversified than both Cott and Coca-Cola. On the other hand, Coca-Cola owns the top brand name in the world, and that's difficult to compete with. Like Cott, Coca-Cola is likely to focus more on what's selling well, which includes ready-to-drink teas, juices, sports drinks, and energy drinks.

If you're looking for fundamental comparisons between these three enterprise, then Cott clearly leaves much to be desired:

(Source: company financial statements)

There would be little sense in paying up for Cott when Coca-Cola and PepsiCo are more attractive, whether measured by ROE, net margin, or overall brand strength. The two positives for Cott are its impressive yield and quality debt management, but Coca-Cola and PepsiCo are similar in both areas. 

The chart below clearly shows that investors aren't as enthusiastic about Cott at the moment, and given the year-over-year comps, that's not likely to change. 

COT data by YCharts

Conclusion
Cott is very capable of making the necessary changes to meet consumer demands. It might do so by offering more health-oriented beverages in the future. In the meantime, too many trends are working against Cott for an investment. You're likely to be safer in Coke or Pepsi, which offer better valuations and stronger fundamentals.