just On Call: Analysts downgrade Cott Corp on commodity costs
Stifel Nicolaus analysts downgraded their estimates on Cott Corp's 2011 sales and earnings
Stifel Nicolaus analysts have downgraded their estimates on Cott Corp's 2011 sales and profits after the firm highlighted the short-term challenges it will face from commodity costs this year.
Speaking at an investor conference last week, Cott Corp's CEO, Jerry Fowden, told attendees that the firm's biggest challenge currently is rising commodity prices. He said that, over the past 12 months, most of the major commodities used by Cott have undergone "significant inflation, such that most are at or above the 2008 pre-credit crisis peak".
Of Cott's main commodities - aluminium, oil, apple juice and corn - apple juice concentrate is expected to double in cost in 2011. The price of oil, meanwhile, is at its highest point for three years, at around US$103 per barrel.
As a result, Fowden said that Cott's commodity costs will increase by 8% in 2011, or between US$10 and $12m per month.
"We saw much of this coming and set out to cover it with appropriate pricing, pricing of around 2% to 3% for CSDs and additional specific juice-related pricing," he added. "These pricing actions have largely been understood by our retail partners, and once implemented should fully restore margins to within 1% or so of our 2009/10 run rate."
However, Stifel Nicolaus analysts Mark Swartzberg and Aashiv Sha, were less confident about Cott's ability to absorb commodity costs with price increases on drinks.
"We continue to recommend the sidelines, believing an attractive deleveraging and diversification story is offset by continuing commodity headwinds," the analysts said in a note late last week.
The analysts lowered their full-year sales guidance for Cott to $2.35bn, from $2.42bn previously, and cut EBITDA guidance to $245.9m from $252m. They expressed doubts about Cott's volume projections and, in particular, its ability to use price rises to lift margins on its Cliffstar business.
Nonetheless, Cott's Fowden said that he is confident that the business is "in much much better fundamental shape than it has been for a long time".
"In our case for 2011, we have more commodity coverage than normal," he said. "Additionally, for 2011, for the first time we have certain foreign exchange forwards and fixes, all of which are designed to give us greater commodity price visibility and certainty."
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