Picture it: You're in a bar. You're slightly disoriented due to the thumping music, the hazy room, and the one-too-many cocktails you've enjoyed. Your eyes affix on an attractive person across the smoke-filled room. You've got enough liquid courage coursing through your veins to make your move, so you go for it. As you stagger toward your prey, images come into focus and you realize the object of your desire is an old-school telephone booth.
Reminds me a bit of New Jersey-based Central European Distribution (Nasdaq: CEDC ) , a company that produces, imports, and sells vodka in Poland, Russia, and Hungary. This $220-million-market-cap company also imports spirits, wine, and beer including brands Jim Beam, Corona, and Budweiser. The stock currently trades for roughly $3 per share and is down 91% from five years ago.
At first glance, this stock has the makings of a great "Hey-I-made-a-bundle-off-this-cheap-stock" story. But while this stock resides in a sexy industry and is trading at a rock-bottom price, there's more to this narrative.
Let's remove our vodka goggles and examine three reasons this company warrants a closer look:
- Questionable sales figures and declining margins: Net sales were up 120% over the past four years mostly due to acquisitions, but the company is restating financials after incorrectly estimating the extent of trade rebates. Meanwhile, lawsuits have materialized claiming executives misled shareholders by overstating sales figures. And margins are declining -- gross margins were 51% in 2009, 46% in 2010, and 39% in 2011. Last year a $1 billion non-cash impairment charge left net income at negative $1.3 billion.
- Goodwill and intangibles: Goodwill and intangibles account for an overwhelming 61% of assets. Compared to data from other companies that rely heavily on branding, this figure is high. Goodwill and intangibles account for 33% of total assets for both Coca-Cola and Diageo (NYSE: DEO ) , 56% for spirits company Beam (NYSE: BEAM ) , and 49% for Constellation Brands (NYSE: STZ ) .
- Excessive debt: Central European Distribution has $108 million in cash on the balance sheet, just shy of $1 billion in long-term debt, and nearly four times the amount of debt to equity. In its 2011 SEC 10-K filing, the company openly acknowledged that its cash plus available credit would not sufficiently meet its future note obligations. The filing also notes that last year's net losses and the $1 billion impairment charges "raise substantial doubt about the company's ability to continue as a going concern."
But we Foolish investors give credit where it's due. Despite the dire state of its balance sheet, Central European Distribution has three things going for it:
- Selling vodka to Russians: Russia represents the world's largest vodka market, with vodka representing more than 90% of the Russian spirits market. And this market is consolidating. The top five producers, including Central European Distribution, currently enjoy 55% market share. In 2006, they experienced 26% market share.
- Strategic alliances: Central European has developed alliances with investors, namely Russian Standard, to assist in debt restructuring in the past. So it's highly likely that Russian Standard will swoop in to alleviate future debt burdens and take greater ownership stake. Russian Standard already owns 28% of Central European.
- Spillover effects: Central European currently imports Budweiser and Corona brands to Eastern Europe. The maker of Budweiser, Anheuser-Busch InBev (NYSE: BUD ) , and maker of Corona, Grupo Modelo, recently announced a deal allowing greater geographic reach for both businesses' brands. This may likely mean that Central European will import more beer brands to Poland, Russia, and Hungary.
Foolish bottom line
If you like the prospect of selling Russians vodka, consider Diageo. Diageo -- maker of Smirnoff, Ketel One, and Ciroc vodkas -- saw total volume and total organic sales increase last year. Diageo enjoyed a 9% increase in volume movement and 12% increase in organic net sales movement in Russia. The company boasts a healthy balance sheet, increasing sales and margins, organic growth, and a dominant global presence.
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