Selling Russians vodka is a mouthwatering business. One alcoholic-beverage company that does it boasts strong market share and beneficial strategic alliances. But with mountains of debt on the balance sheet and declining margins, will the company's expected sales growth outpace its obligations?
Central European Distribution (Nasdaq: CEDC) produces, imports, and sells vodka in Poland, Russia, and Hungary and also imports spirits, wine, and beer, including brands Jim Beam, Corona, and Budweiser. Let's examine the allure of this company.
Selling Russians vodka during bust and boom
Russia represents the world's largest vodka market, with vodka representing more than 90% of the country's spirits market. This market is consolidating, with the top five producers enjoying roughly a 55% market share, compared with a 26% share in 2006. Central European Distribution boasts a 15% market share by volume in Russian vodka production.
Since Central European offers vodka at sub-premium, mainstream, and economy pricing tiers, the company can take advantage of consumers' trade-ups and trade-downs during good and bad economic times.
Strategic alliances may save the day
Central European has developed alliances with investors, namely Russian Standard, to assist in debt restructuring in the past. So it's possible that Russian Standard will swoop in to alleviate future debt burdens and take a greater ownership stake. Russian Standard already owns 28% of Central European and has not been shy about its goal to gain a controlling stake in the company.
In the past 18 months, insiders have been purchasing shares on the open market and hold nearly 26% of outstanding shares. A private investor and spirits-business consultant recently increased his stake in the company and now owns nearly 10% of outstanding shares.
Spillover effects from other deals
Central European currently imports Budweiser and Corona brands to Eastern Europe. The maker of Budweiser, Anheuser-Busch InBev (NYSE: BUD), and the maker of Corona, Mexico-based Grupo Modelo, recently announced a deal allowing greater geographic reach for both business' brands. This could benefit Central European Distribution; however, these beer imports currently represent a small portion of the company's overall sales.
But let's evaluate the company fairly and Foolishly. In spite of my bull argument so far, Central European Distribution worries me for several reasons.
Questionable sales figures and declining margins
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. Gross margins have declined nearly 24% over the past two years, and a $1 billion non-cash impairment charge left net income at negative $1.3 billion last year.
Goodwill and intangibles
Goodwill and intangibles account for an overwhelming 61% of assets. Compared with other companies in the beverage industry that all rely heavily on branding, this figure is high. Goodwill and intangibles account for 56% for spirits company Beam (NYSE: BEAM), 49% for Constellation (NYSE: STZ), and 33% of total assets for both Coca-Cola and Diageo (NYSE: DEO).
Excessive debt
Central European Distribution has little 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 sources and available credit would not sufficiently meet its future obligations. Management goes on to say that because of net losses and the $1 billion impairment charges in 2011, "These conditions raise substantial doubt about the company's ability to continue as a going concern."
Foolish bottom line
If you like the prospect of selling vodka to the world's largest vodka market, take a look at Diageo. Maker of Smirnoff, Ketel One, and Ciroc vodkas, Diageo enjoyed a 9% increase in volume movement and a 21% increase in organic net sales movement in Russia. Diageo boasts healthy financials, increasing sales and margins, organic growth, and dominant global presence.
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