Bottoms Up for Central European Distribution

"Nostrovia!" they toast in Poland before throwing back tumblers of vodka. The phrase means "to good health" -- something the global economy is lacking. However, one product that tends to keep selling despite turbulent economic times is alcohol.

Central European Distribution (CEDC - commentary - Cramer's Take) is the largest alcoholic beverage distributor and producer of Vodka in Poland, the fourth-largest vodka-consuming country in the world and 25th in total alcohol consumption. With premium brands distributed in Hungary and a recent acquisition of a leading Russian vodka producer, Central has a major platform in the consolidating beverage industry of Eastern Europe.

Central's product portfolio includes more than 700 brands along with 170 distributors delivering to 39,000 outlets. Since the company's IPO in 1997, Central has become the largest integrated beverage business in Poland through numerous acquisitions and a firm eye on costs and receivables. Nearly 80% of all Polish alcohol distributors have merged or gone out of business over the last 12 years and Central has been the main consolidator, with sales and earnings growing 29% and 30% respectively over the last four years.

In addition, Central has been expanding outside the Polish market to take advantage of accelerating consolidation caused by the economic turmoil. Earlier this year, Central made several acquisitions in Russia, including a large interest in the country's largest vodka producer. The company now has a strong platform to enter the largest vodka market in the world.

With these acquisitions, the company has expanded its risk profile, taking on a $310 million convertible debt offering earlier in the year. However 76% of the company's debt is long-term going out to 2012 and 2013. There is a portion of short-term debt that will need to be refinanced in the first half of 2009, which currently scares investors although the company appears to have cash flow and resources.

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At the time of publication, Gear had no positions in any of the stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.