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With the world falling apart, Europeans seem just as dejected as we Americans are feeling. Central European Distribution (NASDAQ:CEDC) wants to help you through the night by supplying vodka, beer, wine and other spirits to the Polish population. Business has been booming since 2000 and shows no signs of slowing up. In fact, the last four quarters of actual reported showed year-over-year comparisons of $2.85 versus $1.65 [+ 72.7%] with the just completed September quarter coming in at a better than forecast $0.87 versus $0.42 in 2007.

Full year estimates for 2008 and 2009 are now running $2.80 and $3.60, making CEDC's P/E a very low 8.5x this year's and 6.6x next year's consensus figures. Unlike most stocks, this one hit its yearly high quite recently - CEDC traded at $77.50 in mid-July.

Here are the (split-adjusted) per share figures since 2000 [as reported by Value Line]:

Year…... Sales…...C/F…...EPS…….B/V……Avg. P/E

2000 ….. 8.96 .…. 0.14 … 0.07 …....1.13 …….. 18.8x

2001 ….. 11.92 .... 0.28 … 0.17 ……1.39 …..….. 9.9x

2002 ….. 14.68 … 0.49 … 0.44 ……2.16 …..….. 9.0x

2003 ….. 17.71 … 0.71 … 0.64 ……3.43 …….. 15.9x

2004 ….. 23.45 … 1.02 … 0.87 ……4.86 …….. 18.0x

2005 ….. 21.06 … 0.70 … 0.70 ……10.54 …… 35.7x

2006 ….. 24.56 … 1.67 … 1.53 ……13.55 …… 16.7x

2007 ….. 29.51 … 2.16 … 1.91 ……20.22 …… 20.3x

2008* ….35.95 … 3.05 … 2.80 ……17.85 …… 17.5x

2008 numbers include Q4 estimates.

Debt is manageable, with only $6.7 MM due in the next 5 years and estimated cash flow equal to about four times capital spending needs.

CEDC's current valuation is well below even the 9 – 10x level from the last recessionary period in 2001 – 2002. Buyers of these shares at that time paid split adjusted prices of $1 - $6 and watched the shares climb to $29.90 by fall 2005. Even 12 times the 2009 expectation of $3.60 EPS leads me to a $43.20 target over the next 12 – 14 months (+ 82% from today's quote).

Value Line is using a more aggressive 18 multiple in calculating its 3 – 5 year target of $70 - $110 (based on $5.00 in EPS by that time).

Value Line also notes that CEDC shares have remained popular longer term and have outperformed 85% of the 1700 stocks in their universe over the past decade.

If you're option savvy and want a good 7 month play you might consider this one:

…………………………………………..Cash Outlay ....…….Cash Inflow

Buy 1000 shares @ $23.64………....... ($23,640)

Sell 10 June $25 calls @ $5.50/share ……………………….. $5,500

Sell 10 June $22.50 puts @ $5.90/share ….……………….... $5,900

Net Out of Pocket ………………………. ($12,240)

At expiration date next June:

If CEDC shares are $25 or higher (+ 6% from today's price):

  • Your shares will be called away for $25,000.
  • Your $22.50 puts will expire worthless (a good thing for you - the seller).
  • You will have no shares and no option obligations left.
  • You will hold $25,000 for your initial $12,240 cash outlay.

If CEDC shares are unchanged at $23.64:

  • Your $25 calls will expire worthless.
  • Your $22.50 puts will expire worthless.

You will still own 1000 shares of CEDC worth $23,640 from your original outlay of $12,240.

What is your breakeven point if things go badly?

On the shares you bought it's your $23.64 original cost less the $5.50/share call premium received. You won't be behind unless the shares go below $18.14 by the third Friday in June. Thus even a 23% drop will not hurt you.

On the $22.50 puts, your breakeven is that price less the $5.90 put premium or $16.60/share. You cannot lose money on the puts unless the shares dropped by over $7.04 (-29.7%) by expiration date.

In a worst case scenario you must be prepared to own 2000 shares total for an average net cost of ($18.14 + $16.60) / 2 or $17.37/share. That's just 21 cents a share above the panic low on CEDC set on October 24th. Prior to that, these shares had not been lower than $18.20 since late in 2004 when earnings were only one third of today's level.

Disclosure: Author owns shares and is short puts on CEDC.

Source: CEDC: Profiting from a Market That Can Lead You to Drink