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3 Reasons to Worry About Central European Distribution

Nicole Seghetti
July 9, 2012

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