In these uncertain times, I look for companies that generate consistent results, regardless of the economic climate. In good times or bad, Eastern Europeans tend to be avid consumers of vodka.
Central European Distribution
(CEDC)
, the largest manufacturer of vodka and other spirits in Poland and the fourth largest in the world, is one of those companies with a strong niche, on an upward trajectory, and decidedly recession-proof.
CEDC derives most of its revenues (96%) from its Polish base, but has recently closed the purchase of 85% of Russia's leading vodka brand, Parliament.
Organic growth has led to a 24% sales jump and a 25% rise in EPS in 2007. EPS is expected to rise another 15% in 2008 to between $2.25 and 2.40, according to management. Some of the gains are expected to accrue from the Parliament acquisition.
Vodka represents 72% of CEDC's production, but in Poland, it also distributes beer, which represents 9% of sales, and wine, another 8%. It imports both of these latter spirits, including such high-profile liquors as Remy Martin cognac, Teacher's whiskey and Jim Beam bourbon. Its wines are lower quality, including midrange wines such as Sutter Home from California and Concha y Toro from Spain.
But given the latest acquisition, CEDC is well positioned to be the global leader in vodka, its primary spirit. In Eastern Europe and Russia, CEDC's main competitor in terms of beer sales is
Heineken (HINKY.PK).
But elsewhere, Heineken is faltering as beer volumes have been flat. The company missed the consumer shift towards premium beers. (In response to extremely weak revenue growth in 2007, Heineken is launching an initiative with German appliance maker Krups to sell a "kegenator," a home draft-beer dispenser).
The graph at right captures the relative market performance of the two stocks over the last two years. Despite CEDC's relative outperformance, shares trade for a reasonable 1.93 times trailing sales, slightly lower than sector norms of 2.42 times.
Vodka, Premium and Mainstream
As noted, CEDC is largely focused on vodka sales, offering a range of mid- and high-priced brands. Bols is the flagship brand in Poland, while its fast-growing Royal Vodka brand is the top seller in Hungary.
Sales in the U.S. are rising quickly, but still account for less than 1% of sales. (Nevertheless, U.S. investors have taken note of the company's stellar performance, as the company's ADRs trade a robust 400,000 shares per day on the
Nasdaq).
CEDC has ample room to tap further growth in its core Polish market, which is currently valued at between $6 billion and $8 billion in terms of alcoholic beverage sales.
It's not just vodka that's in demand. Beer consumption rose by 8% in 2007, while wine sales grew at a more robust clip, though total wine sales are still fairly modest in relation to beer and liquor.
Strong Organic Growth in 2007
As noted above, CEDC's EBIT grew 29% last year, thanks to a 10-basis-point jump in gross margins. While cash declined by 45% due to the Parliament acquisition, debt leverage fell from 76% to 58%.
As the table below notes, organic growth rose at a faster clip in 2007, and rising incomes in Eastern Europe could help to sustain this metric, although the new acquisition of Parliament vodka will likely dominate the growth mix in 2008.
|
Proportion of organic growth in total revenue growth |
Proportion of revenue growth represented by increase in sales by acquisitions |
| 2006 |
2.40% |
13.50% |
| 2007 |
6% |
4.50% |
Regardless of where the growth is derived, the company is increasing its strong grip on the Eastern European spirits market.
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At the time of publication, Vijayraghavan was long CEDC.
Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.
Currently, Vijayraghavan is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.
Vijayraghavan holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.
Read our conflicts and disclosure policy.
