Launched back in 1990 by a U.S. expatriate from Florida, Warsaw (Poland) headquartered Central European Distribution Corporation (CEDC) started out as a fleet of trucks that dropped off cartons of vodka and beer to stores around Poland. Today, CEDC is the leading importer and distributor of alcoholic beverages in Poland, and its portfolio of more than 700 brands includes a wide range of alcoholic beverages, including Remy Martin, Jim Beam, Metaxa, Corona, Foster’s and Guinness Stout beers.
In recent years, CEDC also has transformed itself into one of the leading producers of vodka worldwide. Its brands include Absolwent, Bols and Soplica, and its premium Polish brand — Zubrowka — which the company exports around the world to France, the United Kingdom, Japan and other parts of Asia. You can even find the Zubrowka brand in upscale bars in major U.S. cities.
CEDC’s home market is Poland, "New Europe’s" largest economy. With a population about the size of Spain, Poland’s economy is expected to grow between 6% and 6.5% this year. Inflation is low; the Polish currency is strong; and unemployment has dropped nearly 20% from a few years ago to about 12% today. All this translates into consumers spending more money on CEDC’s products.
Poland’s size and dynamism alone would be big enough to make CEDC a solid investment bet. But recently, CEDC has started to spread its wings in countries in "New Europe." Last year, it bought a leading liquor distributor in Hungary and is also rumored to be eyeing expansion into the Czech Republic and Romania.
And in what probably was the most bullish development in connection with the company’s future, CEDC announced its intention to buy almost 100% interest in a company that owns Russia’s fast-growing and top-selling premium vodka, Parliament Vodka. Building on Parliament’s 200-member sales force, CEDC also intends to sell its own vodka brands and other imports in Russia. Why is this such a big deal? Not only is Russia about 4x the size of Poland, it also has the highest per-capita consumption of vodka in the world. (Poland is #2).
After a decade and a half of building its business in the region, CEDC is starting to hit its financial stride. Management expects sales this year to reach $1.18 billion, up from $944 million last year and less than $300 million only five years ago. In Q2 of this year, CEDC reported a 21% increase in revenue over the same quarter last year to reach $269 million. Earnings jumped 22% to 34 cents a share.
Indeed, after announcing its Q2 results, CEDC raised its outlook for both its profits and sales for 2007, citing lower ingredient costs and economic growth in Poland. The company now expects to report 2007 profit of $1.56 to $1.72 per share on revenue of $1.10 billion to $1.15 billion. Analysts estimate that earnings will jump a robust 31% this year. Over the longer term, CEDC should be able to sustain earnings growth in excess of 20%, even as it transforms itself into a bigger company.
So buy Central European Distribution Corp. (CEDC) at market today. If you want to shoot for even bigger profits, I recommend the December $40 call options (CUVLH.X). Given the volatility in global markets, I’m going to give this one some extra room to move and place our stop at $29.50. You may also want to take a smaller position than you normally do, and add to your position as markets recover and the stock moves in our favor.
PORTFOLIO UPDATE
Market volatility whipsawed a number of our positions this past week and we exited all but four of our picks — Telvent Git, S.A. (TLVT), Korean Posco (PXY), Canada’s Potash (POT), and the Powershares DB G10 Currency Harvest Fund (DBV).
The current volatility in global markets can be extremely frustrating — as is hitting so many stops. And sticking to your stops is one of the psychologically challenging things about managing your own investments. Ignoring your stops is like running a red light: you may get away with it for a while, but keep doing it and you’re asking for big trouble.
The good news is that all conventional contrarian indicators that measure market sentiment are as negative as they have been in recent financial memory. The odds are that this bodes strongly for an upturn in the market. At the same time, one of the many first rules of trading is "don’t catch a falling knife." And until this knife stops falling, it’s best to sit on the sidelines.
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