Cheers to the Zloty

Alright, I was an idiot. I was wrong. I admit it. I was looking at the wrong numbers. I was saying that it was a good idea to buy Central European Distribution Corp. (CEDC). I started talking CEDC in early October: here, here, and recently here. Great, so I established that we have a potentially great company, but the stock price was not confirming my gut. I should have been watching the Zloty, which is the Polish currency. See how the exchange rate peaked in July and the stock price did as well?

Click to enlarge

Alright, now that you understand that the company and its currency are absolutely correlated (duh), it’s time to talk the Zloty. The following is an inverse of the first chart, but it makes the rest of the idea easier to write out:

Click to enlarge

Why am I so bullish on the Zloty now? Well, for starters, I’m fairly positive that the run to safety and to the return of your money instead of the return on your money is at an end or very close to an end --- some would call this the collapse of the U.S. Treasury Bubble. I’m also betting on this through a bearish treasury ETF TBT.

But, to be honest, don’t listen to me about future Zloty exchange rates. Below are a few useful sources that yield this positive inclination that I’m betting on.

Bloomberg expects the Zloty to surge. This would bring the Polish Zloty exchange rate down to $2.39. If this happens, and the Zloty surges 21%, you’ll see 100%+ surges in CEDC. $50 isn’t out of the question.

The company itself expects $2.5 to $2.6. Here I’d expect a 100%+ surge as well.

Their central bank has been saying the weakness is unjustified. Meanwhile, they’re trying to pass ERM-2.

Polish bankers are frustrated with the hammering of their currency and “dishonest reports.”

How am I justifying this 100% surge? Well, the 2009 EPS forecast is $4 compared to the 2008 EPS forecast of about $3. That’s a 33% increase. But, if you take the expected exchange rate from $2.5 to $3.17, a 27% unexpected increase, you’re left with a 5% comparable increase in EPS. Factor in the risk and the market is pricing the company about right, at a PE of about 8, which implies 0% growth. Take out this unexpected exchange rate increase, which is what the central bankers would advise and you have a company that’s been growing for 10 years and is set for a 33% increase in EPS over 2009 and more market dominance in the future. A P/E ratio of 20 is not out of the question.

Hopefully Paul Price hasn’t closed his position yet. Yikes!

Disclosure: Author owns CEDC and owns January 2010 Calls @ $30 on CEDC.

Comments

[Socialism c...:]

Are you sure your last name isn't Bradliescziewski???

Jan 15 04:36 PM

[{5U}:]

Time for THE OBAMA BOUNCE

CHASE THE RALLY HoPE anD ChaNGE


phew...we got some more bail outs...

Jan 15 08:39 PM

[Yvgeny Ersc...:]

CEDC is going nowhere. The Zloty is likely to be devalued at some point in the future. Good company. But, it doesn't matter when you have a currency that is unreliable. Good try, Bradford. You have a lot to learn about owning foreign shares and the inherent risk associated with investing in the fortunes of a country you know nothing about.

Drink up! It will make you feel better while you wait for the Zloty to appreciate against the U.S. currency. Not gonna happen.

Jan 17 11:50 PM

[Glen Bradford:]

Hey, you may be right. I'm trying to figure this thing out too.

seekingalpha.com/artic...

Currently the PE is 5.42, the Zloty exchange rate is 3.38.

So, is CEDC a good buy at this price? Let's see.

I'm going to be conservative

G = 20%

P/E = 8+.5*G= 18

The company expects 2.5, and it's 3.38. Their 2009 forecasted EPS is $3.75

3.75*2.5/3.38 = 2009 EPS at current currency rates = $2.77

2.77*18 = what the current price should be at the current exchange rates and at the forecasted growth P/E

Target Price: $50, phew, that's a margin of safety.

So, how far can this currency swing before we are screwed?

Let's say that for each 5% the currency goes unfavorably, the company's growth rate decreases 1% and their 2009 earnings decrease 5% before exchange rates are applied. (Again, this is very very conservative).

Using that methodology,

Currency rate:projected price
3.549:45.17
3.718:39.71
3.887:34.85
4.056:30.51
4.225:26.63
4.394:23.149
4.563:20.03
4.732:17.236
4.901:14.729 (woohoo, that's where we are today!)
5.07:12.48
5.24:10.46

So, the current price is forecasting a 45% depreciation in the Zloty against the US Dollar based on that hypothesis.

I think CEDC is still a buy at these levels. Hope this helps.

Jan 23 10:03 PM

[Yvgeny Ersc...:]

CEDC is not a buy at these levels. Bradford, look at what the market is telling you. There is a major currency devaluation going on here. The Zloty may easily depreciate by 200% or more in the next 6 months (from current Zloty/USD exchange rates).

There's no trust in the currency. There's no trust in the exchange rate. It's a floating rate that cannot be stabilized right now. I live in Poland and I've seen this before. No trust in currency = no trust in economy = no trust in CEDC. Don't be foolish. It's going to be years before our economy recovers from this and the Zloty may not even exist in its current form. Throw your calculations out the window. The Zloty is not like the American currency. It will devalue and not regain value. You don't understand what's happening here.

Jan 25 01:02 AM

[TwoAxes:]

Is there more fundamentally wrong with the Polish Economy?
Are exports falling off the chart. Low exports usually mean a weak currency.
Thanks.


On Jan 17 11:50 PM Yvgeny Erschonkovich wrote:

> CEDC is going nowhere. The Zloty is likely to be devalued at some
> point in the future. Good company. But, it doesn't matter when
> you have a currency that is unreliable. Good try, Bradford. You
> have a lot to learn about owning foreign shares and the inherent
> risk associated with investing in the fortunes of a country you know
> nothing about.
>
> Drink up! It will make you feel better while you wait for the Zloty
> to appreciate against the U.S. currency. Not gonna happen.

Jan 29 04:53 PM