Central European Distribution Corp. – Keeping Spirits High Since 1998

Shares are listed on the NASDAQ under the symbol CEDC and trade this morning at $31.00. Earnings had risen dramatically from 2000 through 2008 with EPS growing from a (split-adjusted) $0.07 to $2.93 over that 8-year period. The company now expects 2009 earnings to come in between $2.35 and $2.50 /share due to unfavorable exchange rates. Management indicates $3.00 - $3.15 as their best projection for 2010.

CEDC shares had been market darlings from 2003 through mid-2008 on the strength of their rapid growth. Peak prices of $61.10 and $77.50 were touched in 2007 and 2008. In the craziness of early 2009 they bottomed at an incredible $6.00 before rebounding strongly as the market recovered.

Here are CEDC’s per share numbers as reported by Value Line:

* 2009 data includes Zacks estimates

Based on the 2009 – 2010 expectations CEDC now trades for about 12.8x this year’s and 10x next year’s earnings. Those are pretty low for CEDC by historical standards. Buyers in 2001 – 2002, the last time P/Es were lower than today; saw their split-adjusted shares surge from $1 – 2 to $30 over the next few years.

If earnings rebound to next year’s lower end estimate of $3, even a 13 multiple would bring CEDC shares back to $39 or plus 25.8% from this morning’s quote. Is that a reasonable target price? CEDC shares actually traded as high as $31 in 2006 on EPS of $1.53. They hit peaks of $61+ and $77+ in 2007 – 2008 and have been as high as $36.41 already this year.

Here’s what I think is an even better play than just outright purchase of the shares.

If CEDC shares merely stay above $30 through the June 18, 2010 expiration:

· The $30 calls will be exercised.

· You will sell your shares for $30,000.

· The $30 puts will expire worthless.

· You will have no further option obligations.

· You will end up with no shares and $30,000 in cash.

This best-case scenario will result if the shares:

· Go up.

· Stay unchanged.

· Decline by up to $1.00 /share (-3.2%).

You would show a cash-on-cash net profit of $10,200/$19,800 = 51.5% in less than

eight months even if the shares do nothing!



What’s the downside?

If CEDC shares finish< $30 on the June 18, 2010 expiration:

· The $30 calls will expire worthless.

· The $30 puts will be exercised.

· You will be forced to buy another 1000 CEDC shares.

· You will need to lay out an additional $30,000 in cash.

· You will have no further option obligations.

· You will end up with 2000 CEDC shares.

What’s the break-even point on the whole trade?

On the original 1000 shares it’s their $31.00 purchase price less

The $6.10 /share call premium = $24.90 /share.

On the ‘put’ shares it’s the $30 strike price less the $5.10 /share

put premium = $24.90 /share.

Your break-even is $24.90 /share or $6.10 below the price at the trade’s initiation.

CEDC shares could fall by up to 19.6% without causing a loss on this trade.



Summary: Central European Distribution looks like a good choice for a 20 – 30% move up over the next 12 months or so. The valuation is low by historical standards and the fundamentals appear strong.

Buying shares and writing in-the-money calls and out-of-the-money puts mitigates much of the risk yet would still permit a cash-on-cash return of over 50% between now and June 18, 2010.



Disclosure: Author is long CEDC shares and short CEDC options. I wrote CEDC shares up previously when its shares were at a lower price. You can see my previous write-up at www.BeatingBuffett.com .



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Dr. Paul Price: After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools.

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