Acquisitions Raise CEDC's Spirits

You could charitably say that the past few months have been hectic for the management of Central European Distribution Corp (NASDAQ:CEDC). Having already built a sizable alcohol distribution business in Poland, the company has taken major steps toward broadening the business and added two large distilleries as well. While the company's burgeoning debt presents some risk, its vertical expansion could pay dividends down the road.

Granted, the old business was hardly underperforming. Third-quarter results, which don't include Biaylstok and would include only about a month and a half of Bols, saw sales climb 29%, margins expand, and adjusted net income grow nearly 29%. EBITDA performance was also quite strong, growing nearly 41% from last year.

Although CEDC does not yet produce a lot of cash flow relative to sales, free cash flow through nine months has nevertheless grown nearly 60%. Given that the debt for the deals is already on the books, and those deals haven't yet really started contributing to results, I think that bodes pretty well for the company's ability to handle its debt and still produce free cash flow growth.

Even with two major acquisitions in one quarter, it doesn't look like management is locking away the checkbook just yet. Based on their comments, they apparently expect to acquire more distributors in Poland, ideally adding about $100 million to $120 million in sales. Although I would expect the distillery operations to change the profile of organic growth, the company saw only about 2% internal organic growth in the third quarter. It would seem, then, that growth in the distribution business will have to come from outside.

Although CEDC is now the fourth-largest vodka maker in the world, we're not talking about a business like Anheuser-Busch (NYSE:BUD), Diageo (NYSE:DEO), or even Constellation Brands (NYSE:STZ) just yet. Rather, we're talking about a small company operating in a modestly sized country. Sure, there's potential now for CEDC to launch new brands and even begin exporting spirits, but that will all take time to materialize.

In the meantime, investors should evaluate CEDC as a small, risky, but fast-growing stock. Growth through acquisition and sizable debt are risks that shouldn't be ignored, but alcohol is a great business, and I believe the company should have good cash flow potential over the years. Of course, each investor needs to decide for him or herself whether that potential is already reflected in the stock price.

For more spirited Foolishness:

• When No Doesn't Mean No
• Can Diageo Fire It Up?
• A Taste of CEDC's Future

Anheuser-Busch is a Motley Fool Inside Value recommendation. Diageo is a Motley Fool Income Investor recommendation.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).