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 .
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:
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 | 33.31 | 2.95 | 2.93 | 19.13 | 17.7x |
2009* | 26.60 | 2.90 | 2.42 | 21.72 | 11.1x |
* 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.
Cash Outlay | Cash Inflow | |
Buy 1000 CEDC @ $31.00 /share | $31,000 | |
Sell 10 June $30 calls @ $6.10 /share | $6,100 | |
Sell 10 June $30 puts @ $5.10 /share | $5,100 | |
Net Cash Out-of-Pocket | $19,800 |
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 .
