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Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.
Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.
Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?
You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.
If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.
Home / Markets
Tuesday, April 22, 2008
Buy Order
One Manager is All A-'Buzz' Over Central European Distribution
Kathryn Vasel
FOXBusiness
One fund manager took a shot of Central European Distribution (CEDC) and it went down smooth.
As a leader in
the alcoholic beverage market in Europe, Central European Distribution experienced a 26% increase in sales in 2007 and raised
its full-year guidance for 2008.
“What first attracted us to the company was its accelerating growth in revenue, earnings,
and margins,” said Patrick Gundlach, co-portfolio manager of Marshall Small Cap Growth Fund (MRSCX), which first started investing
in the company in 2004. Central European Distribution, out of Bala Cynwyd, Penn., is the largest vodka producer in Poland
and its beverages include Absolwent, Bols and Soplica brands.
“They were [buying] up vodka distribution units...which
allowed them to get scale in the marketplace and with all the acquisitions they were constantly beating and raising earnings
estimates, ” said Gundlach, who is also vice president of the Milwaukee-based investment firm.
As the years rolled
on, Gundlach and his team wondered if the company could continue its impressive rate of growth as its presence in the vodka
distribution market was approaching levels that could trigger anti-monopoly concerns from the Polish government. “Then [Central
European Distribution] announced it was getting into the distillation business and acquired vodka distilleries.”
According
to Gundlach, the Polish consumer is very bullish and is looking for higher-quality liquors. “After they acquired the distilleries,
they became a brand owner which allowed them to own and develop their own brands and export them throughout Europe and around
the globe,” he said.
In 2007, Central European Distribution posted net income of $69.8 million, compared with $46.1
million in 2006. The company's operating income for 2007 increased 29% to $118.1 million from $91.6 million for the same period
in 2006. The company right now operates 17 distribution centers and 87 satellite branches in Poland.
Central
European Distribution has tapped into the Russian market, and announced in March it acquired Parliament, a premium vodka brand.
After the acquisition announcement, the company raised its full-year 2008 nets sales guidance from between $1.03 billion and
$1.04 billion to between $1.42 billion and $1.52 billion.
“This acquisition gives them both the brand and distribution
network, which opens the door to several more years of visible growth,” said the fund manager.
According to Gundlach,
Central European Distribution's premium portfolio will help it make a strong footprint in the Russian market, and will allow
the company to stay at the forefront of market consolidation.
As the health of the U.S. economy continues
to dwindle and consumer spending slows, Gundlach said Central European Distribution is flourishing in a growing market.
“The economy in Europe is incredibly strong, and Poland’s GDP has been flirting with double digits recently,” he
said. “Consumers in Poland and Russia are healthy and continue to develop and move toward premium-price brands and have more
spending power.”
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