Vodka King Hits Rock Bottom
04/18/2011 1:50 pm EST
Central European Distribution (CEDC) hit a new 52-week low on April 13.
At $10 or so a share—down from $22.85 on February 28, 2011, and from a 52-week high near $40 a share back in the spring of 2010—the stock is cheap enough to buy. I think $12 a share is a reasonable six-month target.
But don’t expect a quick bounce to $12, or a fast run to anything above that. Results in 2010 were so bad that they have—probably—put a floor under these shares. But 2010 also left management’s credibility in tatters, and it’s going to take a few quarters in which the company actually delivers on its projections before investors believe a word management utters.
The immediate problem was the company’s March 1 earnings release.
The company announced earnings of 17 cents a share for the quarter that ended on December 31. The Wall Street analyst consensus called for $1.13 a share. Continuing operations reported a loss of $103 million.
The revenue picture was just as grim. Revenue fell 58% to $228 million for the quarter. Wall Street had been expecting $255 million.
But the problems stretched much further back than that one quarter. The company had lost market share in its core Polish vodka market. And a series of acquisitions aimed at expanding outside vodka and outside Poland added a significant amount of debt to the company’s books without building sustainable revenue.
When revenue fell in 2010, to $712 million, the company’s long-term debt of $1.25 billion suddenly seemed like a lot bigger load to carry. Long-term debt had been just $467 million at the end of 2007.
So why would you want to buy into this train wreck?
In the shorter-term, the company looks like it has addressed the decline in its market share in Poland. The company’s market share in that country climbed to 22.2% in December 2010, and then 25.2% in January.
Of course, regaining market share is expensive—and this effort is one reason the company’s gross margins fell hard in the quarter from a year earlier. (It also didn’t help that higher grain costs drove spirit prices up 35% by the end of the year from the average price the company paid for spirits in 2010.)
The company also invested in gaining market share in Russia, and saw sales volume in that country increase by 8%.
I’m not convinced that these gains in market share are sustainable at a price the company can pay. Not only did the company increase its spending on marketing—including the launch of the new Zubrowka Biala brand—but it cut prices to increase sales volumes.
The longer-term question is, can Central European Distribution hold onto these share gains and rebuild margins? As I said, management has to deliver.
In the longer term this is still the No. 1 play in two of the largest spirit markets in the world (Poland and Russia). The Polish economy has been one of the fastest growing in Europe and Central European Distribution is a good way to profit—potentially—from a move toward more expensive brands as incomes rise in Poland. (The company is a major importer of beer, wine, and more upscale spirits.)
Russia presents some near-term worries over license renewals in 2011, but the country is still an attractive market for the company.
If you’ve got the patience to stick this one out while the company rebuilds its credibility with investors, I think this stock will reward you over the long run. (That’s why the stock is a member of my long-term Jubak Picks 50 portfolio.)
But this is going to be a long process, and this company is likely to test your patience more than once in 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Central European Distribution as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.