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November 30, 2005

Cramer Discovers Central European Media Enterprises

Central European Media Enterprises (CETV) shares will pop sharply on the open and likely be volatile for a couple of days because Jim Cramer mentioned it as a buy on his popular CNBC show Mad Money. Cramer moves stocks because he has lots of followers. He also has lots of detractors which is why I expect some volatility. Cramer's newfound bullishness on CETV is based upon the planned opening of a casino in Slovenia by global gaming giant Harrah's Entertainment. Cramer wanted a more direct play on Slovenia which led him to CETV.

I have a long standing low $60s target on CETV. It is a thinly traded stock subject to big moves in either direction. I plan to put in an order to sell about one-third of client holdings around $59 this morning just in case the pop off Cramer's comments gets out of hand. CETV is the largest individual stock holding in most client accounts so if this sale goes through, it will just be a trimming action to capture profits as has been done with several other Northlake holdings over the past few months.

A summary of Cramer's comments on CETV and some additional thoughts are in the "Extended Comments" section….

Here is what was written on theStreet.com about Cramer's comments:

Slovenia became investable Tuesday, said Cramer, because Harrah's Entertainment announced plans to build a casino there. The news is meaningful because Harrah's is the best-of-breed casino stock with a CEO who knows what he is doing, said Cramer.

But, Harrah's Slovenian casino won't be finished until 2008, too far off to make Harrah's a play on Slovenia, he said. And, it's too hard to do homework to invest in companies in Slovenia that don't trade here.

However, Central European Media, an operator of private TV stations in central Europe, does trade in the U.S. and derives 18% of its revenue and 26% of EBITDA from Slovenia, said Cramer. CETV owns two of the top four networks in Slovenia and has a 35% market share there, he said.

CETV reported 138% year-over-year revenue growth last quarter, and although the stock appears expensive at 83 times this year's earnings, the company is growing so fast, it is trading at just 24 times next year's earnings, he said.

The bottom line, said Cramer, is "Slovenia is now officially -- because of Harrah's -- a place that will make you money. You want to make out like a bandit? You buy Central European Media."

Cramer has some bad data here. Pro forma for the acquisition of TV Nova in the Czech Republic Slovenia represents just 9% of revenue and EBITDA in 2005. Excluding Nova he is still a little off as revenue and EBITDA from Slovenia are 15% and 20%, respectively.

Despite that error, I think there is a larger point here which is that the countries of Central and Eastern Europe are attracting increasing investment from Western European and American companies. This leads directly to increasing television advertising as these companies attempt to establish their brands in the emerging consumer economies in the region.

Slovenia is actually a fairly mature market for CETV and offers below average growth relative to the 15% long-term corporate growth rate I expect. Slovenia is marketing itself as "the new Switzerland" so a casino makes sense. In the long run, it will certainly help the TV advertising market as casinos are big advertisers. In the short run, Slovenia should show above trend growth of 14% in 2006, bouncing back from a flattish 2005 that was held back by some changes to local employment laws.

Posted by Steve Birenberg at November 30, 2005 08:22 AM in CETV