CEDC has more been a victim of forces like the meltdown in emerging-markets related stocks rather than company-specific issues. Since CEDC does most of its business in the Polish Zloty and reports results in U.S. dollars, the strengthening of the dollar has been a clear headwind for the stock in terms of sentiment.
However, the dollar actually hasn't hurt CEDC's reported results much, as the company preannounced better-than-expected third-quarter results while also saying the following:
The Company expects to see the strongest brands getting stronger in this consolidating environment, especially in the Russian market where its brand Green Mark, the number one brand in Russia in terms of volume and value was up over 40% in volume terms in the third quarter 2008. The Company's premium vodka brands which include Parliament (volume growth over 20%) and Bols (volume growth over 15%) have continued to not only outperform the market for vodka brands in Russia and Poland but also accelerating gross margins which are estimated to be between 25% to 26% for the 3rd quarter 2008, as compared to 20.6% in the 3rd quarter 2007.CEDC also reaffirmed its 2008 net sales guidance of $1.65-$1.80 billion and earnings guidance of $2.75 to $2.95 a share.
So as I'm writing this, CEDC is trading at $18.72, meaning the stock is trading at roughly 6 times full-year earnings that are expected to grow by about 40% vs. 2007. At these levels, the market is taking an incredibly negative view of the company, which is unwarranted given how well the company is executing.
It's also important to note that slow-growing consumer products company that also have significant exposure to the movement of the dollar are trading at incredibly high valuations relative to CEDC. Plus, I wouldn't count out a larger beverage company making a play for CEDC as a way to expand in Eastern Europe and Russia.
With all this good stuff in mind, I'm going to outline three options trades on CEDC that I'm looking at:
1) Short November $12.50 Put
I'm considering shorting the November $12.50 puts on CEDC to take advantage of the 150%+ implied volatility reading on the options, which is stunning for a company that just announced good news. Assuming I could get 60 cents or better, a 5% ROI would not be bad if the option expired worthless, and if CEDC stock collapsed in the next month, going long under $12 (or about 4.5 times earnings) seems like a sweet deal to me.
2) Long CEDC Stock, Short November $20 call
This covered call trade would bring the cost basis of the stock down under $17 at current levels, with a potential return of 18%, assuming the November $20 call was sold for about $2.05.
3) Long CEDC Stock, Short December $20 call
This is very similar to trade idea #2, except we're dealing with a December option instead of a November one. By shorting the December $20 call against the stock for about $2.70, cost basis for the trade would come down to about $16, with a maximum profit of roughly 21%.
Okay, that's it for now. I'm in no particular hurry to put money to work, but if the market breaks down a bit, I'll look to take a position in CEDC. Until then, I'm doing my best to sit tight!
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