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Cott Corp., best known for its private-label soft drinks, aims to diversify amid stiff competition and low demand.Fernando Morales/The Globe and Mail

A bet beyond lower-margin carbonated soft drinks into the more lucrative water- and coffee-delivery business appears to be paying off for Cott Corp., shares of which have soared about 65 per cent in the past year on the New York Stock Exchange. Investors in Cott's lower-volume Canadian listing have seen their shares nearly double in the past 12 months.

Given the run-up, some analysts and fund managers are cautious about future growth for the beverage company, citing slower sales in its British and European division in the most recent quarter.

Those more bullish on the company say weakness in that overseas unit isn't a major concern, given that it accounts for only about 15 per cent of revenue and operating profit. Instead, they believe the company's giant leap into other beverage markets will continue to fuel the stock.

In a note called "Brit blip a brief blot," CIBC World Markets analyst Perry Caicco said sales in North America are strong.

"Cott's business is in great shape," said Mr. Caicco, who has a "sector outperformer" (similar to "buy") and $15 (U.S.) target on the stock.

"The legacy [North American carbonated soft drink] business is of course declining, but is being offset by growth in other beverages and contract manufacturing."

In November, 2014, Cott, best known for its private-label soft drinks, announced it was buying DSS Group Inc., a major player in the U.S. water-delivery market and provider of office coffee services, for $1.25-billion.

Cott's aim is to diversify amid stiff competition and slumping demand for soft drinks, as consumers reach for healthier alternatives. The acquisition has reduced its private-label business to just less than half of total sales, from about three-quarters before the deal.

Of the 12 analysts that cover Cott, eight have a "buy" recommendation and four say "hold," according to S&P Capital IQ. The analyst consensus price target over the next year is $13.45, almost 30 per cent above where it's currently trading around $10.50.

Jefferies analyst Kevin Grundy has a "hold" on Cott and recently lowered his target to $11.50 from $12 after the company reported lower sales in the British and European division in the most recent quarter, which it blamed on bad weather, competition and a tough retail market. The division has been a top performer for the past three to five years, according to the company.

"The difficult U.K. environment (both macro and micro) clearly worsened for Cott," Mr. Grundy said in a note. "While management is moving to reduce its cost structure, improve its supply chain, better service rapidly growing hard-discounters, and explore strategic options, protracted weakness in its U.K. business is expected to persist over the next few years."

David Burrows, president and chief investment strategist at Toronto-based Barometer Capital Management, likes the consumer products space, but is hesitant to buy Cott shares at this point in what he describes as its "turnaround story," especially given recent challenges in Britain and Europe.

"Over the next couple of quarters, they'll have to show that operationally they'll continue to make headway and that [the overseas division] isn't going to be a big problem," Mr. Burrows said.

Meantime, his firm prefers to own other "highly defendable brands" such as Home Depot Inc., Starbucks Corp. and Walt Disney Co., which Mr. Burrows sees as having more pricing power.

Stephen Takacsy, chief investment officer and portfolio manager at Montreal-based Lester Asset Management, said his firm has stayed away from buying Cott shares because of the volatility over the years. He also doesn't see a lot of meaningful growth ahead, even in the new coffee and water business.

"It's a real grind," Mr. Takacsy said. He also believes the valuation "is somewhat stretched," and worries about the company's ability to pay down its debt from the DSS deal.

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