Has Central European Distribution Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Central European Distribution (NASDAQOTH: CEDCQ  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Central European Distribution.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(5.9%)

Fail

 

1-year revenue growth > 12%

5.5%

Fail

Margins

Gross margin > 35%

37.9%

Pass

 

Net margin > 15%

(57.1%)

Fail

Balance sheet

Debt to equity < 50%

653.6%

Fail

 

Current ratio > 1.3

0.81

Fail

Opportunities

Return on equity > 15%

(101.1%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Central European Distribution last year, the company has dropped a point, as its balance sheet current ratio dropped dramatically. The stock has done even worse, losing half its value over the past year as the distributor struggles under the weight of huge net losses.

Central European's primary business is vodka, a lucrative business especially in its Eastern European territory. It also has an agreement with Anheuser-Busch InBev (NYSE: BUD  ) to import Budweiser and Corona beer to Eastern Europe.

But Central European has had a terrible 2012, which is especially out of character compared to its peers. For the most part, companies that sell alcohol have done fairly well in 2012. Industry leader Diageo (NYSE: DEO  ) has a number of top-selling brand names, including its Smirnoff vodka that goes up against Central European's Polish vodka. Beam (NYSE: BEAM  ) , the 1-year-old spinoff from Fortune Brands, has also seen its shares rise over the past year, and Svedka Vodka maker Constellation Brands (NYSE: STZ  ) has sported impressive profit margins that show the resilient demand for spirits even under tough economic conditions.

Central European didn't make investors happy with its June announcement that it would have to restate past financial statements due to its failure to make correct estimates of some of its rebates. Since then, its bond rating has plunged, leaving investors in doubt about the company's future.

In November, Central European brought on a financial advisor, likely to advise it on strategic options. It asked its biggest shareholder, Russian billionaire Roustam Tariko, to make a buyout bid for the company. No official announcement has been made, although the company made an SEC filing last week announcing the unregistered sale of 3 million shares to Tariko's Roust Trading. That sent shares soaring.

For Central European to survive, it needs to refinance outstanding convertible notes that mature in March. Without a satisfactory resolution, the company may never have any chance to recover in its bid for perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Central European may not be your best bet for next year, but we've found a better prospect. The Motley Fool's chief investment officer has selected his No. 1 stock for the next year, and you can find out all about it in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

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