Was Central European Distribution the Perfect Stock in 2011?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Central European Distribution (NAS: CEDC) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Central European Distribution.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.6%)||Fail|
|1-Year Revenue Growth > 12%||11.9%||Fail|
|Margins||Gross Margin > 35%||39.4%||Pass|
|Net Margin > 15%||(113.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||190.8%||Fail|
|Current Ratio > 1.3||2.11||Pass|
|Opportunities||Return on Equity > 15%||(79.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With a score of only 2, Central European Distribution is leaving investors feeling hungover. The company has a huge debt load that has some shareholders worried about possible downgrades for its credit, which could hurt its ability to service its debt going forward.
As its name suggests, Central European Distribution distributes alcoholic beverages throughout Central and Eastern Europe. The company is Russia's largest seller of vodka. With the European economy looking incredibly scary right now, sin stocks like fellow spirits purveyors Beam (NYS: BEAM) and Diageo (NYS: DEO) -- as well as tobacco companies Philip Morris International (NYS: PM) and British Tobacco (ASE: BTI) -- should be performing well.
But Central European Distribution has bigger problems. Although the company attracted privately held Russian Standard Corporation enough to boost its stake to 30%, shares have still lost about 80% of their value this year. That's largely because Central European Distribution almost defaulted on its debt earlier this year, wrote down a big chunk of its assets, and has faced high taxes and input costs along with distribution network challenges. Moreover, past buyout rumors haven't panned out, so shareholders are rightfully skeptical about expecting someone to save them from their losses.
Going forward, Central European Distribution's top priority has to be to resolve its debt issues. Whether that requires a takeover or a major restructuring, there's no realistic chance of the company getting off the mat without doing something to improve its balance sheet.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Diageo and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Beam, Diageo, and Philip Morris International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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