Spirits producer is in play

Central European Distribution has seen plenty of interest this year -- but its businesses remain troubled.

By Jim J. Jubak Nov 29, 2011 4:28PM
A Russian billionaire has bought a piece of Central European Distribution (CEDC), one of the world's largest vodka producers, according to a filing with the U.S. Securities & Exchange Commission.

Premium vodka maker Russian Standard and its chairman, Roustam Tariko, filed notice with regulators Monday stating that they had acquired a 9.9% stake in Central European Distribution. The stake of 7.2 million shares was acquired between Nov. 15 and Nov. 21 for an average price of $3.52 a share. The SEC filing calls this a strategic investment. 

The stock was up 29% Tuesday afternoon to $4.39, a 25% gain over Tariko’s average purchase price.

Tariko, a billionaire with a fortune estimated at $1.9 billion by Forbes, founded Russian Standard, which is a leading consumer group in Russia. (He also owns the Miss Russia beauty pageant.)

Tariko's move follows the August announcement of a 9.6% stake in Central European Distribution by Mark Kaufman, a business consultant for the wines and spirits industry and the founder of the Whitehall Group, an importer and distributor of wines and spirits in Russia. Kaufman, born in Moscow, sold the Whitehall Group to Central European Distribution in 2011.

I think it’s fair to say that Central European Distribution is in play. Kaufman is co-chairman of the LVMH Moet-Hennessy Louis Vuitton (LVMUY) advisory board for Russia. 

Now the question is do you want to stick around to see how this plays out (and how long that
might take) or take the recent gains and move on? Central European Distribution is a member of
my Jubak Picks 50 portfolio, where the stock is down 77% since I bought it on Dec. 30, 2008. The stock is, however, up 47% from its Nov. 10 low at $2.93.

I’m inclined to sell and take my profits (and losses) here. (By the rules of my Jubak Picks 50 long-term portfolio I can only buy and sell once a year at the end of the year. So in that online portfolio I have to hold until the next revision in January 2012.)

Let me tell you why I’d like to sell now so you can make up your own mind.

It helps if you think of Central European Distribution as two companies, both troubled, but one much more troubled than the other.

The Polish company is troubled by slow volume growth -- forecast at just 3% in 2012 by Credit Suisse -- and some cannibalization as some of the company’s new brands ate into sales of existing brands. That resulted in a charge of $88 million from impaired goodwill in the third quarter of 2011.

But the Russian company is struggling not only with slow volume growth -- forecast at just 2% in Russia -- but with price erosion too as higher taxes in Russia put pressure on customers and forced Central European Distribution to cut prices, costing the company margins. The Russian part of the company also took a much bigger hit -- $459 million -- for impaired goodwill in the third quarter.

It looks like turning around the Polish part of the business is well within management’s capabilities. Poland is likely to escape a recession in 2012 and to continue to be one of the fastest growing economies in Europe. That should support prices and slow growth in volumes.

In Russia the problems are, in my estimation, beyond current management. The Russian consumer feels very strapped now and is likely to feel even more so in 2012. Taxes slapped onto the vodka by the government will make it hard to produce any volume growth at all without price cuts. In Russia the company needs more distribution and more market share.

The company as a whole faces another big problem in 2013 when it will need to pay about $1.2 billion in senior notes. (It looks like the company has the cash to meet its needs before then.) Moody’s Investors Service downgraded the company’s credit rating after third quarter results reported on Nov. 4.

Management has lowered its estimates for six straight quarters now and I think its guidance will be high again for the fourth quarter (which ends in December.) For example, the company told analysts it expects an EBIT (earnings before interest and taxes) margin of 20% in the fourth quarter; that’s significantly above the 10% EBIT margin for the first nine months of the year. So there’s definitely a strong possibility of another negative surprise when the company reports those results. (The company missed analyst estimates by 11 cents for the third quarter.)

On a fundamental basis I have trouble seeing this as more than a $3 stock.

If you want to hold on in hopes that somebody will acquire the company, just try to stay reasonable in your expectations. The stock already trades at a premium to its closest Russian peer Synergy (SYNG.RU in Moscow).

Jim JubakAt the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares in Central European Distribution and LVMH Moet-Hennessy Louis Vuitton as of the end of
September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Nov 29, 2011 5:38PM

I don't understand.

Why did you think this company was a buy when it cost 5x more but you think it's only worth $3 now that it has fallen all the way to $4?

How do you reconcile these positions? 

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