Today, a report on a Canadian growth stock that depends heavily on acquisitions for its growth. Cott Corp. makes a wide range of beverages for retailers and distributors, including carbonated soft drinks, juices, and bottled water. Last year it made two major acquisitions with the purchase of U.K.-based Aimia Foods and DS Services in the U.S. Together, these acquisitions cost Cott over $2 billion. This year it has added several smaller takeovers in the U.S. The company’s shares have risen almost 95% in the past year and the stock trades at a very high multiple to earnings. The company also carries a heavy load of debt and its products compete with those of giants like Coca-Cola and Pepsi-Cola.

Cott Corp. (symbol BCB on Toronto; www.cott.com) is a leading maker of beverages for retailers and distributors. It also makes drinks for companies that sell them under their own labels.

Cott makes a range of products in a variety of packaging and sizes, including carbonated soft drinks, juice and juice-based beverages, flavoured water, tea and energy drinks, as well as alcoholic beverages.

The company has over 60 plants and 180 warehouses in the U.S., Canada, the U.K. and Mexico. North America supplies 80% of its revenue and 65% of its earnings. Around 26% of its beverage sales come from Wal-Mart.

Soft-drink sales have suffered in the past few years as consumers switch to healthier alternatives, like bottled water.

To cut its reliance on soft drinks, Cott paid $87.6 million for U.K.-based Aimia Foods, a maker of coffee, hot chocolate and cereal, in May 2014.

In an even bigger move to diversify, the company bought DS Services for $1.25 billion in December 2014. DS delivers bottled water, coffee and tea to offices and homes in the U.S.

Growth stocks: Latest acquisitions for Cott are two U.S. bottled water distributors

These acquisitions boosted Cott’s sales by 42.0% in the three months ended July 4, 2015, to $779.8 million from $549.2 million a year earlier. DS Services’ revenue was $257.0 million, or 33.0% of the latest quarter’s total. Excluding new businesses and exchange rates, sales fell 1%.

Without integration costs and other unusual items, earnings rose 2.3%, to $17.6 million from $17.2 million. Cott sold shares to help pay for its latest purchases, so its earnings per share were unchanged at $0.18 on more shares outstanding.

The company ended the quarter with cash of $79.0 million, or $0.72 a share. However, its long-term debt of $1.55 billion is a very high 103% of its market cap. Goodwill and other intangible assets also total a high $1.5 billion. That adds a lot of risk.

Cott recently bought two more companies that deliver bottled water to clients in Pennsylvania, Florida, Georgia and South Carolina. The company didn’t say how much it paid, but these businesses will add $9 million to its annual sales.

The stock has gained 94% in the past year, mostly in response to the company’s diversification strategy. But it now trades at 42.0 times the $0.33 a share Cott will likely earn in 2015. That’s a high multiple for a firm that still gets about 40% of its revenue from drinks that compete with Coke and Pepsi. The company also has little brand loyalty.

Cott’s growth-by-acquisition strategy also adds considerable risk and will likely compound its already very high debt and goodwill.

The company pays quarterly dividends of $0.06 a share, for a 2.3% annualized yield.

We don’t recommend Cott Corp.

Inner Circle recommendation: SELL

For a recent report on a growth stock that has been consistently successful with acquisitions, read Smart acquisitions make Alimentation Couche-Tard one of the best investments in Canada.

For our examination of the rewards and risks of growth by acquisition, read What does growth by acquisition mean, and what are the risks?

When a stock doubles in price, what do you do?