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Central European Distribution(CEDC) was a $70 stock back in 2008 but can now be had for under $4. Back then, investors saw this as a perfect vehicle for investing in Eastern Europe's consumer preference for liquor. Rising disposable incomes meant surging demand for the company's premium spirits. Management became enamored of the region's potential growth and embarked on a debt-fueled spending spree that set the stage for an eventual $1 billion in annual revenue but also parked more than $1 billion in debt on the balance sheet.
That turned out to be a recipe for disaster: Russian regulators temporarily closed some of the company's facilities in a spat over licensing; the regional economy cooled, dampening demand; and raw material costs (for items like grains) soared. In a tacit admission that the company overpaid on many of its deals, CEDC just took a massive $674 million asset write-down that spooked lenders.
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Yet beyond all that noise, there remains a healthy underlying business. In the first nine months of 2011, CEDC still managed to generate $46 million in operating cash flow (despite tough industry conditions). Guidance for the current quarter implies decent EBITDA margins on about $250 million in sales. In effect, business stinks, but it's not terminally broken.
Meanwhile, rumors swirl that several Eastern European investors would like to buy some or all of the business. With the stock falling sharply in recent weeks, the company's board has to guard against any moves made at fire-sale prices, but it's increasingly clear that CEDC possesses coveted spirits brands in a region that is still poised for long-term economic development. And shares now trade at just 20% of book value. Merrill Lynch, which has been consistently bearish on the company's prospects, still maintains a $5.50 target price, which is nearly 60% above the current share price.