Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

CETV Presents At Bear Stearns Conference

Central European Media Enterprises (CETV) shares have steadied since the sharp fall last week following announcement and pricing of their convertible deal. The timing on the convert was terrible coming in the midst of the market's meltdown. I think the fact that it included a complicated capped call transaction made folks shutter as complicated is a bad word in securities these days. The capped call requires use of about 13% of the deal size to purchase calls which will eliminate dilution between the conversion price of $105 and $151. According to management, essentially they converted a 3.5% up 25% convert into a 7.2%, up 80% convert. I trust these guys deeply so I'll accept that this was best way to raise money for buying out their partners in Ukraine and reloading for future deals including a rumored entry into Turkey.

After the close on Tuesday, CETV CEO Michael Garin presented at a Bear Stearns conference. I listened to the webcast and came away with these observations which are incremental to what I feel is a deep knowledge of this company:

(1) Garin said CETV would double through organic growth in “4 or 5 years.” Might be minor but the official guidance on this measure issued just two weeks ago is five years.

(2) Garin noted that CETV knows 80% of their revenue by the end of March and though it has not happened in the company's history if there were a shortfall they had nine months to adjust their cost structure.

(3) Regarding the convert, Garin noted the goal was to have two years of “activity” on their balance sheet. He said this required them to do a $400 million deal. The bankers came up with the idea to raise it to $475 million so they would have the funds for the capped call.

(4) Just prior to Q&A Garin addressed a bearish Merrill report on the company which centered on concerns about Romania’s economy. He said that based on the fact that they have received no resistance to price increases on advertising this year (most of the year has been sold since January 1st) they don’t see a problem for CETV. He also said based on their on the ground observations and actual trends they monitor in retail sales, Merrill is wrong. Later in Q&A someone asked about Romania and to a room full of laughter, Garin said again that Merrill is wrong. I would add that CETV's COO is their long-time Romanian partner who is one of the most revered businessman and richest people in Romania. I am very confident that CETV has a better read on Romania than anyone at Merrill Lynch.

(5) Maybe most meaningful, Garin said that if they owned and managed Ukraine last year they would have made $50 million EBITDA instead of the $27 million reported. 2008 will be an investment/restructuring year in Ukraine so I don’t look for much more than 5% EBITDA growth but this comment does give you a sense of the upside in 2009 and beyond.

(6) In response to a question on free cash flow, Garin said they have about $100 million in FCF before capital spending. Capex in 2008 will be about $130 million so no FCF this year but maintenance capex is $65 million and that is where he thought they would be in 2009 when they would be FCF positive after capex again.

Put it all together and CETV remains the both growth stock in traditional media, fully financed, and deeply undervalued.

CETV Issuing Convertible Bonds

CETV announced a $425 million convertible offering after the close yesterday with a $50 million green shoe. Proceeds will be used to acquire another 30% of its operations in Ukraine, bringing control and 90% ownership. Given its strong balance sheet, CETV didn't need to raise this money to fund the $210 million Ukraine purchase so it is probably fair to assume that they are getting close on another acquisition. Over the weekend, there was an article in the Financial Times indicating that they were in position to partner with new local owner of Turkey's leading commercial TV station group. In addition on its last conference call, management made it pretty clear that they would be purchasing additional operations in Ukraine. Both of these deals could be dilutive to current valuation assuming that the acquired assets are in start-up phase or under earning. However, Ukraine and Turkey are huge markets in terms of population that are enjoying rapid GDP growth and advertising growth in the range of 20-40%. In other words, CETV would be buying the next leg in its growth profile beyond the current leg that has been driven by the Czech Republic, Romania, Slovakia, Slovenia, and initial forays into Ukraine.

More assets in Ukraine, a new market in Turkey, and the pending turn to profitability in Croatia (70% revenue growth but an operating loss in 2007), would provide enough upside to sustain 20-30% growth for another five to seven years. In the meantime, Romania remains a 20% growth market, CETV 's second largest operation, the Czech Republic, has another year of 15% local currency growth, and Slovakia has 15% local currency revenue growth but huge upside in margins. CETV EBITDA is up 85% since 2004. Well financed acquisitions in high growth markets offer a great chance to extend the run. That makes the sharp drop on the convert deal an opportunity for new long positions in CETV.

Good Quarter, Good Outlook For Central European Media Enterprises

Central European Media Enterprises (CETV) reported excellent 4Q07 results easily beating estimates on revenues, EBITDA, and EPS. Revenues and EBITDA grew 40% and 33%, respectively, with all six countries where the company owns TV stations or networks beating my estimate for revenue and five of the six countries beating my estimate for EBITDA. To gain some sense of the magnitude of the beat, my revenue estimate was $286 million and the company reported $301 million. For EBITDA, I was looking for $111 million and the company reported $129 million.

For the year, revenue and EBITDA grew 39% and 46%, respectively. For 2008, I am looking for 20% revenue growth and slightly expanding margins to drive 26% EBITDA growth. Free cash flow is beginning to be meaningful and could reach close to $100 million in 2008. In its conference call presentation, management said that it would to double revenues over the next five years with margin expansion leading to even faster EBITDA growth. Given the recent track record of consistent 20% plus annual growth and the rapidly growing ad markets throughout Central and Eastern Europe this is very reasonable expectation.

The shares trade at less than 11 times my 2008 EBITDA estimate ascribing no value to the company's rapidly growing but not yet profitable operations in Croatia and the #2 or #3 position of its internet properties in most of the countries in which it operates. Doubling revenue in five years with margin expansion indicates that revenues will grow about 14% per year with EBITDA slightly above that rate. Given current forecasts for 2008 advertising growth in Central and Eastern Europe, higher growth seems likely at least in 2008.

With US media companies struggling to grow at 5-10% trading for 7-8 times EBITDA, I find the shares of CETV to be way too cheap. Assuming 18% growth in 2009, a 12 multiple on forward estimates would get the shares to $130. All it will take to get the shares moving again is a decent market that allows investors to start having confidence in the future and fewer worries about the stocks perceived as risky. I think it is a good bet that CETV shares and management team will continue to deliver for at least the next two years....

....You may ask if the numbers and outlook were so good, how come the shares traded off yesterday? I think that is a good question. Volume was not heavy so I suspect it was just a sell the news reaction in a bad market day. Some investors may feel that the great numbers received too much of a tailwind from favorable currency. However, in local currency, CETV grew at least as fast as its markets in every country but Romania. Don’t cry for Romania which grew by 45% in local currency slightly less than the 50-60% local currency growth of its ad market. Other investors may have been put off by the company's decision to invest capital and operating expense in Ukraine in 2008 at the expense of margins. Given that Ukraine's ad market is growing at 30% a year and that it has by far the largest population of any CETV market and that there are definite parallels between Ukraine and Romania and that CETV is getting full control of its Ukrainian operations in 2008, this seems like a smart investment. Just to give you a sense of the upside in Ukraine, in 2003, revenues in Romania were just over $50 million. In 2007, revenues reached $215 million. There is solid reason to believe management statements that Ukraine will grow to be the company's largest market in the next 5 to 7 years off the 2007 revenue base of $125 million (The Czech Republic was #1 in 2007 with $279 million in revenues.)

The bottom line is CETV has been and remains the best growth story in media with a strong management team that has consistently produced superior results. I've owned the shares since just after 9/11 and been richly rewarded. I expect the shares to move up 50-100% in the next few years. Just remember that CETV shares have volatility associated with emerging market investments. That means you need ignore the day-to-day movements in the shares and keep your eye on the big picture. It's a pretty picture.

CETV Gets The Rest of Ukraine

Central European Media Enterprises (CETV), announced very good news yesterday. CETV will purchase the minority interests in its lead station in Ukraine, Studio 1+1. CETV will immediately take its 60% interest to 90% and has a put call option exercisable a year after closing for the remaining 10%. The 30% piece is being purchased for $220 million. The 10% piece has a rising price starting at $95 million and scaling to a minimum of $109 million after one year subject to an independent valuation.

Based on my estimate of 2008 EBITDA at 1+1, the multiple is 19 times in a range of 17 to 25 for the two step transaction. This is a high price but it provides full control and thus requires a premium. Full control is worth a lot to CETV as it dramatically reduces emerging market risk related to underdeveloped legal and regulatory systems. More importantly, full control in the past has meant a big bump in revenues and profit margins as CETV's proven and superior management team applies its full expertise. The most recent example is Slovakia where EBITDA will be triple the 2005 pre-full ownership base in 2008.

CETV still retains risk associated with emerging markets. Many investors use it as a proxy for emerging markets exposure. This leaves the stock vulnerable to sharp sell-offs in emerging markets such as what occurred in January. However, there is no question that the fundamental outlook for growth is superb. The stock is a bargain at 11 times my 2008 EBITDA estimate as long as you can stomach well above average volatility in market downturns.

Good News At CETV Keeps On Flowing

Given the proximity of Central European Media Enterprises (CETV) annual analyst meeting on October 19th to the third quarter earnings report, I figured there would not be much new news or stock reaction to the results. Ooops. As it turns out, CETV reported better than expected results with all six countries where its own TV properties contributing to the upside. The shares responded and traded up $9 following the pre-open earnings report on Thursday.

At its analyst meeting CETV provided detailed, country-by-country guidance for 2007. Given that we now have three quarters of results in the bank, it is quite easy to see the implied guidance for 4Q. And guess what? It looks quite conservative. Based on year-to-date trends, favorable currency exchange, and knowledge of advertising in Central and Eastern Europe, I think the implied fourth quarter guidance is particularly low in Romania and Slovakia and probably has upside in the Czech Republic.

Heading to the analyst meeting I expected guidance to go up, led by these three countries. Instead, management confirmed my estimates (which were above many analysts) and dramatically boosted guidance in Ukraine which had been cut earlier in the year due to weak ratings and uncertainty over the level of political spending. I now think my initial intuition was correct and we will see results at or above the high end of guidance when the company reports its full year results....

....This simple math is available to anyone with a spreadsheet or a sharp pencil so I suspect that it is what was beyond the stock's huge rise against an awful tape. The company may also be getting some benefit from user data on its early forays into the internet business where the company had 10 million unique visitors in October across the sites operated by its TV stations and networks. No revenue yet but on the call management said it was just starting to shift its focus from traffic generation to monetization. There is not a lot of upside in dollar terms. For example, internet advertising in Ukraine is just $10 million for the whole country this year. However, broadband penetration is just perking up in Central Europe and the playing field is still open to determine which sites will ultimately prove to be winners. I have nothing in my model for the internet initiative which will cost $10 million in 2007 but I like the strategy and this management team has almost never failed to deliver.

I am just firming up my 2008 estimates and taking a first look at 2009. If the company remains on track to hit the numbers, plenty of upside remains in the shares. That said, I did trim client positions slightly on Wednesday as part of my usual position size control discipline.

Central European Media Enterprises Meeting Recap

The CETV analyst meeting that brought me to Bucharest, Romania, wrapped up just before the open of NY trading last Thursday. All is well. The company raised its 2007 guidance as I had expected in the preview of the meeting I posted earlier this week. Revenue guidance is now $795-820 million up from $764-798 million. EBITDA guidance is now $285-305 million up from $272-298 million.

As is often the case with CETV the composition of the results is somewhat different than I expected. The big upside in the new guidance is in Ukraine where third quarter political advertising and an uptick in ratings so far this fall now has EBITDA in a broad range of $22-35 million for the year. CETV has lost money in Ukraine year to date and had lowered guidance earlier this year when they were unsure of a turnaround. My spreadsheet had breakeven for 2007 heading into the meeting. Czech Republic, Romania, Slovenia, Croatia, and Slovakia all remain on track with my original expectations. I'd bet CETV reaches the upper of its guidance when all is said and done in 2007.

I also heard nothing to change my expectation for a couple of years of 20-30% growth off the 2007 base. If those numbers are achieved, plenty of upside remains.

Just for fun CETV showed a chart of its stock against GOOG indexed to just before GOOG's IPO. Pull it up. It made me not feel so bad about missing GOOG, the greatest media/advertising play on our side of the Atlantic. At least I got the one over in Central Europe.

Central European Media Enterprises Gains Option To Increase Ownership In Ukraine

The column I posted last week providing an overview of Central European Media Enterprises already requires updating. In it I mention that CETV was likely to increase its 60% ownership of Studio 1+1, the #2 TV station in Ukraine, within the next year. As it turns out late last week, the company took a major step toward completing this important strategic goal.

After the close on Thursday, the company announced that Igor Kolomoisky, CETV's newest Board member and one of the richest men in Ukraine, had secured a "valid right" to purchase an additional 21%. Upon Kolomoisky's completion of the acquisition, an agreement is in place for CETV to purchase the stake for an amount not to exceed $140 million. Although there is no guarantee Kolomoisky's right will turn into an acquired asset, based on the company's past history of gaining incremental ownership in its operations, I expect the two-part transaction to be completed reasonably soon.

This announcement is very positive for CETV for two reasons. First, moving the stake up to 81%, along with September's announcement that the company had secured control of the license, should allow CETV to exercise greater management control over 1+1. When ownership stakes turned into control in other countries, most recently Slovakia, revenue and EBITDA growth accelerated sharply....

....Second, the $140 million price implies a valuation of $700 million for 1+1. This year 1+1 will be lucky to operate at breakeven after producing $30 million in EBITDA in 2006. Ratings issues and the uncertain political environment and parliamentary elections in Ukraine are the culprit for the 2007 performance. Most investors value CETV using EBITDA multiples. With Ukraine operating at breakeven, this valuation method implies no value to 1+1 while the Kolomoisky deal values the 81% stake at $560 million or $13 per share. Alternatively, the $700 million value for the whole stake works out to 23 times 2006 EBITDA while CETV trades at 13 times 2007 EBITDA.

Given this analysis, it is no surprise that CETV spurted 8% last week and closed at an all-time high on Friday. I expect good news at the analyst meeting and think plenty of upside remains.

An Overview of Central European Media Enterpises

Since I'll be spending most of next week in Bucharest, Romania at the annual analyst meeting for Central European Media Enterprises (CETV), I thought an overview of this long-time favorite was in order. CETV is currently the largest position in Northlake client accounts and my personal accounts.

CETV is the largest broadcaster in Central and Eastern Europe. The company owns leading TV stations in the Czech Republic, Romania, Slovenia, Slovakia, Ukraine, and Croatia. In 2007, I expect the Czech Republic to produce 36% of revenue, followed by Romania at 26%, Slovakia at 14%, Ukraine at 13%, Slovenia at 8%, and Croatia at 3%.

The investment case is simple: CETV is a pure play on the emerging consumer economies of Central and Eastern Europe. CETV is a US company using US GAAP accounting. Revenue, cash flow, and earnings are growing rapidly. Most importantly, management has consistently delivered on its promises to investors whether they are producing upside earnings surprises or meeting strategic goals for developing and enhancing the value of the company.

CETV is one of the fastest growing media companies in the world capitalizing on booming economies and advertising growth throughout Central and Eastern Europe. GDP in its markets is growing from mid-to-upper single digits, double or triple the rate of growth in Western Europe or the US. TV advertising growth in the region has been 20-30%, driven by high levels of foreign direct investment and rapidly emerging consumer economies. Management has recently been noting how advertising categories like consumer staples are still growth categories whereas in Western Europe these are considered mature. Further boosting the company's growth profile is that the countries it operates in have per capita advertising spending at just 1/3rd the level of the entire Central European region and 1/6th the level of Eastern Europe. This gap is already narrowing.

CETV set a new all-time high on Thursday. The shares are up 45% this year and have tripled since early 2005. The market cap is $4.5 billion. Net debt at June 30th was $435 million. The company is free cash flow positive and produces significant earnings per share. Due to currency fluctuations, EPS are volatile and less useful as a valuation tool.

Like most media companies, total enterprise value to EBITDA is the most widely used valuation metric. The shares currently trade at 15.6 times my 2007 estimate of $284 million in broadcast EBITDA and 12.8 times my 2008 EBITDA estimate of $364 million. I ignore corporate overhead and new media investments but value Croatia at $0, a very conservative assumption.

My 2007 estimate is at the low end of management guidance. I think there is a decent chance that the company will raise the low end of its guidance range at next week's analyst meeting due to favorable currency, strength in the Czech Republic, Slovakia, and Romania, and signs of stabilization in Ukraine. Despite the huge move in the shares, I think plenty of upside remains. My current target is $127 based on 15 times my 2008 estimate. Assuming the company sustains mid-teens EBITDA growth for a few years beyond 2008, something I believe is highly likely, the shares could double again within four years....

....Historically, the company has been controlled through super voting shares held by its founder, Ronald Lauder. In August 2006, Lauder sold half of his control stake to Apax Partners, a major private equity firm with several investments in media. Lauder built the company in the 1990s mainly through ownership of TV Nova in the Czech Republic. A dispute with his former business partner led to the company losing control of Nova and almost going bankrupt in 2000 and 2001. Successful litigation against the Czech government for failing to protect CETV's license concluded in 2001 when CETV was awarded over $400 million. Since that time, investments in Romania, Slovenia, Slovakia, and Ukraine have blossomed and the story came full circle last year when CETV repurchased TV Nova.

CETV is mainly an organic growth story although a significant acquisition of another TV operation in the Central Europe region could occur at any time. For the last few years, the company has been focused on internal growth and gaining larger ownership stakes and control of all its TV licenses. This process is largely complete as CETV controls all of its licenses and has 90-100% ownership in all countries except Ukraine where ownership sits at 60%. I expect ownership to go up in Ukraine over the next year. Full ownership and control of operations and licenses dramatically reduces emerging markets risk relating to developing economies, government institutions, and legal systems.

CETV has been growing very rapidly. From 2000 through my 2007 estimates, the core four markets of Romania, Slovenia, Slovakia, and Ukraine have enjoyed a compound annual growth rate of revenue and EBITDA of 32% and 41%, respectively. I expect growth of 29% and 30% in revenue and EBITDA this year followed by gains of 19% and 28% next year. Growth in 2007 is being supported by a new strategy at Nova that purposefully pressured financial results in 2006. The financial upside of the strategic shift to modernize the Czech TV ad market and cut costs at Nova will continue in 2008. Also contributing greatly to 2007 growth is Romania and Slovakia. Romania will see revenue and EBITDA growth north of 30% in 2007 following several years of 40-100% growth. Slovakia's growth is accelerating sharply this year with revenues up over 40% and EBITDA almost doubling. Slovakia is benefiting from management changes enabled when CETV gained full control of operations, spillover from the Nova restructuring, and a booming Slovakian economy.

In 2008, steady gains in the Czech Republic, Romania, Slovakia and Slovenia will be joined by a rebound in Ukraine and a turn from losses to breakeven in Croatia. This year Ukraine has suffered due weaker than expected ratings and political turmoil. The recent elections went smoothly and CETV just gained full management control of its Ukrainian operations so optimism about 2008 is warranted. Ukraine is set to lose $5-10 million in EBITDA in 2007 following a 2006 profit of $30 million. Even a moderate rebound is material against estimated total 2007 broadcasting EBITDA of $284 million. Croatia has been in a multiyear investment mode that has gone worse than expected. However, revenue growth and ratings have accelerated sharply since mid-2006 (revenue up 38% in 2Q07) setting the stage for a $10-20 million profit swing in 2008.

With GDP growth in Central and Eastern Europe expected to remain in mid-to-upper single digits, gains of 15-25% in advertising growth throughout the region for the next few years are a reasonable estimate. Given CETV's long history of superior execution and positive earnings surprises, merely sustaining the current multiple on 2008 EBITDA is an appropriate assumption. As noted earlier, this is enough to get the shares to $127, up another 25%, even following the huge move recently. Since I am willing to take the risk of emerging market stock price volatility (which is much greater than the volatility of CETV's operations), I believe that CETV remains the premier growth investment among US media companies.

Ukraine Elections Positive For Central European Media Enterprises

Ukraine held elections for the third time in four years over the weekend. The pro-Western block of parties that originally formed the Orange Revolution were the surprise winners by a slight margin. Former Prime Minster Yulia Tymoshenko's party produced the upside surprise bringing in over 30% of the vote, possibly coming in first place. With current President and coalition partner Victor Yushchenko's party bringing home low to mid-teens support, the Orange coalition should be able to produce majority government and appoint Yulia Prime Minister.

Heading into the elections many observers thought current Prime Minister Victor Yanukovych would be forming the next government with his pro-Russian communist allies. Yanukovych's party may still take home the most votes but he will be unable to form a majority coalition. How he and his supporters react will determine whether Ukraine will finally have a stable coalition government.

The outcome of this election is important to Central European Media Enterprises.....

....On the surface a pro-Western government should be a good outcome for CETV. Furthermore, CETV recently added one of Ukraine's richest men and a major Yulia supporter to its Board. One risk, however, is that the Orange collation will return to a policy that reverses privatizations which it followed when it first took control in Ukraine several years ago. It was this policy that led to return of a pro-Russian government. CETV's assets are not at any risk if privatizations are reversed but the policy would probably lead to turmoil that could spoil Ukraine's booming economy and advertising market.

While the election results are a positive for CETV, the more important near-term news is whether the company was able to capitalize on political spending and simultaneously begin to rebuild its ratings Studio 1+1, the #2 ranked TV station it owns in Ukraine. If so, third quarter results could be better than expected and the low end of full year guidance could be increased. CETV also has estimate upside due to continued strength in Croatia, the Czech Republic, Romania, and Slovakia although it is a bit early in the fall TV season to be secure in trends for the balance of 2007 and the first half of 2008.

I expect to hear more on these issues in two weeks when the company hosts its annual analyst meeting. Overall, I expect good news which has the potential to move CETV to new highs. Keep in mind, however, that the shares are very sensitive to trends in emerging stock markets, especially on a day-to-day, short-term basis.

Central European Media Enterprises Gains Control of Ukraine License

Central European Media Enterprises announced earlier this week that it had gained control of its broadcasting license in Ukraine. This is very good news as license control provides added protection against emerging market political and regulatory risk. CETV now controls its licenses in every country in which it operates (Czech Republic, Slovakia, Slovenia, Croatia, Romania, and Ukraine). The license control came without cost for CETV as ownership was established previously but the government had not completed the registration due to various issues within and without CETV's control. The next step will be to increase Ukraine ownership above the 60% level and gain full management control. When CETV completed this process in other countries (most recently Slovakia), results accelerated dramatically and quickly. Last week's news that CETV had sold a 3% stake to Ukrainian oligarch Igor Kolomoisky and invited him to join the Board is probably a prelude to the securing greater ownership in a partnership with Kolomoisky. Despite the shortfall and lowered guidance in Ukraine this year, all of this news is very positive for the longer term upside in Ukraine which has the potential to be CETV's largest market in the next five to ten years.

Central European Media Enterprises Attracts Important New Shareholder and Director

Central European Media Enterprises (CETV) announced yesterday that it had sold 1.275 million shares at $86 for $110 million to Igor Kolomoisky and given him a seat on the Board of the Directors. Kolomoisky will own 3% of CETV, becoming the third largest shareholder after founder Ronald Lauder and private equity firm Apax Partners which bought 50% of Lauder's control stake in August 2006 at $60.

Kolomoisky is the richest man in Ukraine and a major force in economics and politics through his ownership of Privatbank and investments in energy and materials companies. CETV stumbled in Ukraine this year with poor ratings and EBITDA losses. Aligning with Kolomoisky is a strong signal supporting CEO Michael Garin's contention on the last conference call that despite the setback Ukraine will be the company's largest market one day in the future. Kolomoisky offers more immediate upside by possibly smoothing the way for CETV to gain control of its TV broadcasting license in Ukraine (the only market where it does not control its license) and increasing its economic stake in the Studio 1+1 TV network above the current 60%. Kolomoisky also may be helpful as CETV continues its strategy to add new TV stations and networks in Ukraine.

I remain very bullish on CETV with a $130 target based upon my expectations for 2008 EBITDA. The shares are volatile regularly but even more so lately given their status as an emerging markets play.

Ukraine Shortfall Pressures CETV Despite Otherwise Great Results

Central European Media Enterprises (CETV) reported second quarter revenues and EBITDA above estimates. However, the composition of the results caused concern among investors leading to a sharp 5.4% decline in the stock on above average volume. I think investors overreacted and remain very bullish on CETV shares. I was adding to positions in some client and personal accounts into the weakness.

CETV report a 38% increase in revenues and EBITDA, both comfortably ahead of my estimates. Second quarter results represented an acceleration form the first quarter when revenues and EBITDA grew 21%. The Czech Republic, Slovakia, Romania, Slovenia, and Ukraine all matched or exceeded estimates. However, Ukraine had a very poor quarter due to political turmoil and weak ratings. First quarter results in Ukraine were also poor.

As a result of the weak first half in Ukraine, continued low visibility with elections coming up on September 30, and uncertainty on ratings in the fall TV season, management dropped the bottom end of its guidance range for revenue and EBITDA. I believe this is the reason for the negative reaction of the shares. Getting less notice was the fact that management did not adjust the upper end of guidance. In other words, management feels that it is possible to make up the shortfall in Ukraine in the other five countries. Given the momentum in those countries revealed in their exceptional second quarter results, I am extremely confident that full year results for all of CETV will be in the upper half of guidance. The bottom line is that despite assuming Ukraine moves from 12% of 2006 EBITDA to a small loss in 2007, CETV will still make at least what I expected prior to the second quarter report.

I still expect CETV to report 30% growth in revenues and EBITDA in 2007 excluding a $10 million investment in developing the company's internet properties. Excluding Ukraine, I expect revenue growth of 35% and EBITDA growth of 55%. High growth should continue in 2008 where I am looking for 18% and 25% growth in revenue and EBITDA excluding Ukraine. Should the September elections lead to a stable government, CETV's results in Ukraine in 2008 are likely to bounce back with revenue growing more than 30% and a return to EBITDA profits even assuming no rebound in ratings. History would suggest that ratings improvement would occur....

CETV is trading at 11 times my estimate of 2008 EBITDA assuming breakeven results in Ukraine and Croatia. Those two markets will have 2008 revenue north of $150 million combined. Ukraine had $21 million in EBITDA in 2005 and $30 million in 2006 while 2008 will represent breakeven for Croatia after several years of significant investment. The 11 EBITDA multiple implies that there is no value to Ukraine or Croatia which is absurd. I am certain that if CETV held an auction for its stations in those two countries, bids would more than $500 million which equals $12 per CETV shares.

Yesterday's stock price decline and the uncertain outlook in Ukraine creates more risk in achieving my $130 target for CETV shares in 2008. However, my experience with this company and its management team since 2001 leaves me confident that the stock will achieve my expectations.

Central European Media Enterprises Earnings Preview

Central European Media Enterprises (CETV) reports second quarter earnings tomorrow morning. CETV is the largest TV broadcaster dedicated to serving Central and Eastern Europe and owns leading TV stations in the Czech Republic, Slovakia, Romania, Slovenia, Croatia, and Ukraine. CETV is a sizable US company controlled by Ronald Lauder and Apax Partners. The current market cap is $3.8 billion. The company is modestly leveraged with net debt of $325 million. I am expecting 2007 sales of over $750 million and EBITDA of more than $300 million. My model has CETV trading at 11 times 2008 EBITDA. Foreign exchange fluctuations make earnings a crapshoot but my attempt at smoothing calculates EPS north of $3.00 this year.

Revenue and EBITDA has grown rapidly over the past five years as advertising in these markets has grown at rates well in excess of upper single digit GDP growth. With CETV, you get immature and rapidly growing advertising markets, excellent management, GAAP accounting, and a media market where traditional TV stations still dominate and still have room to gain advertising share. I like to compare the Central and Eastern European TV markets to the US prior to the advent of cable TV. Back then, TV was growth industry. In Central and Eastern Europe it still is.

I expect good 2Q results for CETV with revenues rising greater than 20% and expanding margins driving a larger gain in EBITDA....

The Czech Republic, Slovakia, and Romania should be the strongest performers. The Czech Republic and Slovakia could enjoy EBITDA growth north of 40%, while Romania comes in around 30%. A restructured ad market in the Czech Republic and new management in Slovakia are behind the big increases. Romania is just staying on trend.

The weak point could be Ukraine where the combination of political turmoil and weaker ratings should cause a negative comparison and might even lead to a small EBITDA loss. Croatia should show that it has turned the corner on revenue growth ahead of profitability in 2008. Slovenia is CETV's most mature market but should still show gains in the mid-to-upper single digits.

I expect CETV to reiterate guidance laid out on its 1Q07 conference call. The composition may change with higher estimates for the Czech Republic, Slovakia, and Romania offsetting sharply reduced expectations for Ukraine. Country-by-country volatility around a steady 20% plus organic growth uptrend is the norm at CETV.

CETV shares are volatile to begin with and around earnings volatility usually rises. Barring a highly unexpected change in underlying trends, I expect CETV's results to confirm the numbers in my spreadsheet which calculates a 2008 target of $132.

Financial Times Writes Up Central European Media Enterprises

The Financial Times posted an interesting article on CETV and its role in consolidation of European TV stations. The article touched on CETV as a seller and buyer and included some surprisingly frank comments by Wallace Macmillan, the company's CFO.

As a reminder, last year private equity firm Apax Partners bought control of half off Ronald Lauder's controlling stake in CETV. Apax could easily drive CETV to be either a buyer or seller but in the first three years if CETV were a seller Apax has the right to reject anything short of $120. There are a little over two years left.

I think CETV shares can double again in the next few years based on growth in cash flow assuming the stock market cooperates. I also think a buyout in the near-term would probably be in the $140 range.

As for CETV buying more assets in the region including Poland and Russia, at the right price I'd be happy with most deals.

Click on the "Continue Reading" link below for the full FT article. It is beyond the jump due to copyright issues....

Central European Media Enterprises set to play leading role in broadcaster consolidation; RTL, Mediaset, and ProSieben could show interest

Published: July 19 2007 16:32 | Last updated: July 19 2007 16:32

Central European Media Enterprises (CME) is likely to play a central role in the consolidation of Central European broadcasters, with players such as RTL, Mediaset and ProSieben tipped by bankers in the sector as possible buyers.

CME’s finance director Wallace Macmillan, said Nasdaq-listed CME is in a very good position to pursue buys in Central Europe itself and would be interested in merging with listed Polish and Russian counterparts TVN and CTC Media. Two sector bankers, meanwhile, suggested that the Bermuda-based media group could come up for sale in the short to mid term.

A first banker said that, after Apax Partners’ acquisition of a 7.8% stake in CME last year, CME could be sold in the next 18 months. He cited German TV broadcaster RTL and listed Italian media group Mediaset as potential buyers.
A second banker said that CME’s model was similar to the one followed by SBS Broadcasting in the past. It is basically a vehicle to aggregate the sector by buying smaller businesses, he said. Last month, ProSiebenSat.1 Media announced the acquisition of SBS for EUR 3.3bn.

The first banker asserted that RTL should acquire CME as it would give it access to one of the largest broadcasters in the emerging markets where advertising is growing at a phenomenal rate.

According to him, Italy being a saturated market, Mediaset should acquire CME to find growth outside Italy. This banker considered it too late for Mediaset to acquire assets one by one in European emerging markets and said that it would make more sense to acquire CME and get “a huge coverage in one sweep.”
Macmillan said, however, that while players such as RTL or Mediaset could be interested in CME as it has very strong assets, Ronald S. Lauder, CME’s chairman and main shareholder, takes pride in his business and there is no sign he wants to exit. It’s a question you’ll have to ask him, he added. Lauder was not available for comment.
A TVN source agreed that RTL and Mediaset and to a lesser extent the new ProSieben – SBS entity could be natural buyers for CME.

“TVN and CTC could be natural alliance partners for us in the future but one has to find the right timing,” Macmillan said. “If there is an opportunity to come together with TVN, we would be very interested to talk to them, the same goes for CTC.”

Macmillan added that CME knows CTC very well. CTC’s CEO Alexander Rodnyansky is a minority shareholder in CME’s Ukrainian assets and both CTC and CME are listed on Nasdaq, which means both have to meet certain requirements, he explained. That would make a merger easier. Furthermore, it does not get involved in politics or current affairs coverage, Macmillan added. CTC declined comment.
The TVN source said that the company would need to look at synergies. Of course there would be synergies at a head office level, but the main costs are programming, the source said. It is quite a regional business and it is hard to generate significant synergies there, the source added.

“If the controlling shareholders of these companies are interested in selling, we would be interested (in talking with them),” Macmillan added. “However, there are no signals they wish to exit at the moment.”
“If an opportunity arises, given our history and geographic footprint, we would be in a very good position to pursue deals,” Macmillan said. CME has looked at about 20 deals over the last year, if it finds the right target, it would be keen to pursue a deal, he added.

CME would be interested in buying new channels in Romania and in a larger market like Ukraine where it could acquire new broadcasting activities if the right assets become available, he said.
CME could also make acquisitions in markets where it has no footprint yet.

Together with Russia, Turkey is another good example of a growing and exciting market and a country where CME could make acquisitions, Macmillan said. The Balkans, and more specifically Slovenia and Bulgaria, could also be a region of interest for buys. Together with Poland, and given the right opportunity, CME would also like to enter Hungary, he added.

The EUR 150m seven-year floating rate note issued in May this year will finance a potential increase of ownership in CME’s Romanian, Czech and Slovak assets, Macmillan explained.
Last week, CME acquired 20% in Slovak television channel TV Markiza for EUR 57.6m, taking its stake to 100%, it was reported. CME owns 60% of its Czech assets. In June, it bought an additional 5% in two Romanian companies for USD 49.8m to raise its holdings to 95%.

CME has a USD 4.1bn market capitalisation. TVN and CTC’s market capitalizations are PLN 8.04bn (USD 2,95bn) and USD 4.28bn, respectively.

Good News: Central European Media Enterprises Acquires Minority Interests in Slovakia

Central European Media Enterprises (CETV), a name familiar to former Street Insight subscribers as my favorite long-term growth idea in media, announced some good news on Friday. CETV purchased the remaining 21% minority interest in Markiza, its TV station in Slovakia for $79 million. CETV now owns 100% of its Slovakian operations. The purchase price of $79 million equates to a station value of $400 million, a multiple of 13 times my probably conservative estimate of Markiza's 2007 EBITDA. With Markiza likely to grow by 45% this year and at least 20% next year this is a bargain price. Furthermore, I am highly confident that if CETV were to sell Markiza in an open auction the deal multiple would be at 16-20 times EBITDA. Consequently, I view this as a very good and accretive use of CETV's strong balance sheet.

Besides a 10% minority stake in Romania controlled by a put-call option, the only remaining country in which CETV does not own 100% of its assets is Ukraine where a complicated structure leaves the company with a 60% economic interest and a minority stake in the broadcast license. I am certain CETV is working very hard to purchase the other 40% and gain control of license now that a dispute over the ownership of the minority stake has been resolved. I think a deal is probably close but contingent on a more stable political environment in Ukraine that will hopefully emerge following the September parliamentary elections. Even without full ownership and control in Ukraine, CETV's emerging market risk has been reduced over the past few years as the minority stakes and licenses have been purchased....

I expect CETV to report a very strong second quarter led by the Czech Republic, Romania, and Slovakia. Ukraine may continue to lag as it did in the first quarter. With projected 2007 and 2008 EBITDA growth of 40% and 25%, I think CETV shares remain attractively valued 15 and 12 times 2007 and 2008 estimated EBITDA, respectively. I think an EBITDA multiple of 16-18 times is realistic given that is where Univision used to trade when it was enjoying growth of around 20%. Based on 2008 estimates, my current target for CETV is $125-130 leaving plenty of upside even after the shares have gained 40% this year and tripled since early 2005.

Central European Media Enterprises Joins Russell and Receives Good News In The Czech Republic

Central European Media Enterprises (CETV) rose to a new all-time high on Friday. The shares have been unusually strong over the last few weeks even as the market has pulled back. I suspect that much of the strength is related to the fact that CETV is being added to the Russell indices on this year's rebalancing. But something else may be at work.

I've also noticed strength each morning in Prague where the stock has a secondary listing. CETV's largest TV station is in the Czech Republic and should generate about one-third of revenues and half of EBITDA for the entire company this year. Two factors could be fueling buying by Czech and Central European investors. First, TV Nova has sustained strong ratings this year. Second, and probably more importantly, a compromise has been reached on the awarding of digital TV licenses in the Czech Republic. Late last week a bill cleared a parliamentary committee that will grant three new licenses to CETV and its primary commercial competitor while also allowing six licenses previously awarded to new entrants to escape legal limbo. Additionally, the scheduled elimination of advertising on the state-owned TV has been adjusted but in a manner that should still cut state TV advertising revenue by at least 75%. The only downside for CETV is that the new digital license holders can launch services as soon as they want. I'd be surprised if the new stations were able to gain much market share as initial reach will be only 30% of the population and the analog signals won’t be turned until 2012 lessening urgency for households to upgrade to digital....

Given ratings strength in the Czech Republic, a calming political situation in Ukraine, and strong advertising growth throughout the Central and Eastern Europe region, 2007 is shaping up to be another strong year for CETV. I am currently expecting revenue and EBITDA growth of 28% and 41%, respectively. In 2008, I expect momentum to remain strong with revenue and EBITDA growing 19% and 29%, respectively. This growth has been par for the course since 2002 when CETV had $137 million in revenue and $31 million in revenue. In 2007, revenue should be about $775 million with EBITDA of $285 million. Acquisitions have aided growth but much of the gain has been internally generated. The four original markets of Ukraine, Romania, Slovenia, and Slovakia, which produced all of the revenue and profits in 2002, will earn $466 million in revenue and $179 million in EBITDA this year.

With the shares moving up to all-time highs, CETV's valuation is now at 14 times 2007 estimated EBITDA excluding the losses in Croatia which I ignore now that the station has built enough ratings and revenue momentum that it clearly has positive value. After updating my spreadsheet, I am raising my target on CETV to $130 based on the company maintaining a 15 multiple on 2008 estimates and giving credit for free cash flow of about $200 million I project the company to produce in 2007 and 2008 combined. If you are uncomfortable buying on 2008 estimates, using a 15 multiple on 2007 estimates and free cash flow only, the new target is $105.

I remain a buyer of CETV and would be aggressive if the shares give back some of the gains that were possibly fueled by the Russell Index addition. A major sell-off in emerging market stocks could also knock a quick 20% off the shares but as long as revenue, EBTDA, and margin momentum remains, the shares will bounce back strongly.

I'll bet those guys at Apax Partners who bought half of Ronald Lauder's controlling stake in CETV last summer for $60 are pretty happy. I'll also bet they agree with my analysis.

News On Northlake Stocks

Several stocks in the Northlake portfolio have had newsworthy items over the past week. Here is a recap of the latest news, all of which I think is positive.

Disney (DIS) completed the sale of almost all of its radio operations to Citadel Broadcasting (CDL). DIS shareholders received .0768 shares of CDL for each share of DIS they owned. DIS received $1.35 billion in cash from CDL. I plan to hold CDL and will look to add to the small positions if the shares come under pressure as DIS shareholders sell their small holdings. The profile of a DIS and CDL shareholder would seem to have little in common which could lead to lots of selling. Given that the DIS deal about doubles CDL shares outstanding, I think supply-demand imbalances could put some downward pressure on CDL. That was not the case yesterday when CDL rallied on the first day of post-closing trading. CDL has a current yield of over 5% which should limit downside....

Central European Media Enterprises (CETV) announced that it was acquiring 5% of its Romanian operation form its long-time partner and current senior executive Adrian Sarbu. CETV now owns 95% of Romania with Sarbu holdings 5% that has a newly restructured put option. CETV paid $50 million for the 5% stake, placing a value of $1 billion on Romania. I expect Romania to produce about $85 million in EBITDA this year, putting the multiple at 12 times. This actually seems a little cheap to me given that Romania has been growing at 30-40% per year and is projected to sustain a growth rate in excess of 20% for several more years. I suspect that CETV held the upper hand in the negotiations given Sarbu's small minority stake. I am always happy when CETV is able to buy more of its own operations and it is even better when the price is right. I remain a buyer of CETV which has lagged over the last month.

Endeavor Acquisition (EDA) released 2006 and 1Q07 financials for American Apparel and also filed the proxy. These filings indicate the acquisition of American Apparel remains on track for a 3Q07 closing. I have not had a chance to read all the filings but the headlines suggest that everything is on track. Management indicated that same store sales remain strong in 2Q and 1Q EBITDA suggests that the company is on track to meet 2007 guidance. The shares have moved to new highs since the filings. I still think EDA can reach $14-18 assuming American Apparel is able to maintain operating momentum in the first few quarters following the closing of the deal.

Rogers Communications (RG) announced the purchase of five traditional over-the-air TV stations in Canada. All major cities except Montreal were included. It is not a huge deal at $350 million Canadian but based on Canadian press reports it looks like a favorable deal for RG. RG shares remain right at their 52 week high and the prospects for further upside remain as wireless and cable drive mid-teens growth in operating profits and significant free cash flow begins to flow. A price target of at least $45 is realistic.

Central European Media Enterprises Pulls Back On Czech News

Central European Media Enterprises (CETV) shares have pulled back this week amid news out of the Czech Republic concerning the awarding of new digital television licenses. The licensing process has been full of fits and starts with the government initially awarding six new national licenses but failing to provide licenses for the two national analog stations including CETV's TV Nova which is far and away the number one station in the Czech Republic. Following objections from Nova and the #2 station, TV Prima owned by Modern Times Group, the government threw out the awards.

Without warning, earlier this week the government announced that the six licenses originally awarded would be granted and that Nova and Prima would receive their licenses for free. The new licenses would be provisional with a five year term. Analog services would be turned off in 2009 when the switch to digital went nationwide. The government also gave interested parties just 48 hours to respond compared to the constitutionally mandated 13 days.

This news has plusses and minuses for CETV. On the downside, the six new national digital stations would be on the air several years sooner than expected. When the initial awards were thrown out, it was presumed that the whole process would be restarted and no new national stations would launch before 2012. Another problem for Nova would be the analog signal going dark in 2009. Short of the government handing out new digital set top boxes there is no way that all the TV households in the Czech Republic would be able to watch TV on the new digital channels. The combination of new national competitors and loss of reach clearly would be a negative for the long-term growth of CETV's largest asset. This is partially offset by the granting of a free license for the digital Nova, which could be broadcasting from day one of the digital era without any new programming investments unlike the new competitors which would have to spend huge sums on programming and infrastructure with no established audience.

Based on my discussions with management of CETV and other large shareholders, I don’t see how the latest moves by the government will pass constitutional muster with the same Czech courts that already threw out the first awards. Besides Nova and Prima, there are other parties upset with the ruling including those who were passed over when the initial licenses were rewarded....

I long ago learned not to try to predict government or legal outcomes, especially in far away lands. However, the latest moves by the government seem blatantly incorrect and likely to be adjusted. Furthermore, the outlook for TV Nova through 2007 and 2008, a reasonable investment time horizon, is extremely strong as ratings are near all-time highs, cost cutting has been steep since CETV gained control in 2004, and Nova's efforts to restructure the TV ad sales market in the Czech Republic and raise advertising rates for the first time since 1999 are clearly working.

I think the reaction in CETV shares has set up an excellent buying opportunity. CETV is trading at 13 times 2007 estimated EBITDA and 11 times 2008 estimated EBITDA. Given 41% growth this year and 30% next year, I find these multiples significantly too low. In its heyday, Univision traded at 15-18 times EBITDA. CETV's growth is at a premium to Univision and given the open-ended growth for TV advertising in Central and Eastern Europe, I think that CETV should be valued at least at 15 times EBITDA. At 15 times, CETV would trade at $96 this year and $121 next year.

Accepting the risk that the shares are sensitive to trends for emerging market stocks (even through the revenue and cash flow growth is not), I think the latest pullback is an excellent buying opportunity. I've added CETV to new client accounts on this pullback and the stock continues to be one of my largest positions for clients and the largest in my personal accounts.

Good Quarter and Great Guidance From Central European Media Enterprises

1Q07 results and 2007 guidance from Central European Media Enterprises (CETV) are very positive. My bullish interpretation was further reinforced following the conference call and a quick read of the 10-Q. I think the guidance was the primary reason the shares moved up $5 yesterday. I am not done with my spreadsheet yet but I expect my revised target to be $120 assuming 2007 guidance is met and 2008 is a 15-20% up year. The story is very much intact and substantial upside beyond $120 is very plausible in 2008 and 2009.

CETV reported revenue of $148 million and EBITDA of $40 million, representing growth of 22% in both cases. Results were really good in the Czech Republic, Slovakia, and Romania. Slovenia and the start-ups in Croatia and Ukraine were as expected. Ukraine has a significant but well explained shortfall.

Guidance was very strong across the board. The company is no longer providing country-by-country guidance for competitive reasons. The established markets of the Czech Republic, Romania, Ukraine, Slovenia, and Slovakia are being grouped together while Croatia and the Ukraine start-ups are being itemized. Aligning my spreadsheet similarly shows that the established markets are way ahead of street estimates and exceed my most aggressive estimates for revenue and EBITDA. Revenues in Croatia and the Ukraine start-ups are ahead of my estimates as is the EBITDA loss. Foreign currency assumptions are that 1Q07 ending levels are maintained for the rest of the year. The other major assumption is that despite 1Q weakness in Ukraine the country's primary station will grow in line with forecasted 2007 TV ad market growth of 28-31%....

Ukraine represents the primary risk to guidance but CETV has historically been conservative with guidance so there is probably some cushion in non-Ukraine markets to take up any slack. Ukraine faced an unusually tough comparison that saw 1Q06 revenue growth of 77% and EBITDA grow from $2 million to $11 million. $8 million in political advertising related to the March 2006 elections and the debut of Ugly Betty in Ukraine was the source of the tough comparison. Additionally, during 1Q ongoing political turmoil in the country led advertisers to hold back on their commitments and all TV stations responded by cutting pricing. Management believes that advertisers have not cut their full year budgets and that any shortfalls will be made up in the fall season. Major advertisers are already returning with March, April, and especially May results looking much better. Barring more serious political turmoil management's forecast seems plausible but not without risk.

Backing into likely budgets in the other countries, it seems obvious that the new strategy is performing well ahead of initial guidance, boosted further by excellent ratings. A big part of the move in the stock in 1Q was related to analysts raising numbers for Czech Republic beyond guidance. Those moves turned out to be accurate. In Romania, growth remains robust as modest rating deterioration is not impacting monetization as the lost viewers can’t be monetized by stations with tiny reach that age gaining viewers. CETV also continues to add to its stable of networks in Romania. Slovakia is booming as gaining management control, great ratings, and benefits of the synergy with the Czech Republic are providing much faster and larger than expected returns. Croatia's revenue growth has accelerated sharply the last two quarters suggesting long-term returns will be there. As a result, I won’t quibble with increased investment. Slovenia is a more mature market but should be able to sustain moderate growth due to above average GDP growth. Cost control across the entire portfolio is very good, especially on SG&A. Programming expenses are also under control, especially in the Czech Republic.

CETV also announced a Euro 150 bond offering with proceeds for general corporate purposes. Increased ownership in Romania and Ukraine was mentioned and would be greeted very positively, especially in Ukraine where it would come with control of the license. I am pleased to see the company add leverage and not dilute shareholders. The balance sheet is underleveraged at just 2 times EBITDA and free cash flow is becoming significant and growing.

The bottom line is that CETV remains the best growth story in media. The 2007 guidance supports substantial increases in estimates as well as a premium valuation. Barring a collapse in emerging market equities, CETV shares are headed much higher.

Central European Media Enterprises 1Q07 Earnings Preview

I am having a hard time getting a read on expectations for 1Q07 earnings from Central European Media Enterprises (CETV). I expect very strong results driven by the Czech Republic and Slovakia but I don’t have much in the way of analyst reports to get a sense of where street expectations lie. Isn’t it amazing that a stock with a $3.7 market cap that has almost triple since the beginning of 2005 and will produce over $700 million in revenue this year has virtually no coverage? Actually that is one of my favorite things about CETV. It is a lot easier to make money when you are early.

For the record, Yahoo Finance shows one analyst estimate of 5 cents on revenues of $141 million. My spreadsheet calls for revenues of $159 million and EBITDA of $53 million representing growth of 31% and 63%, respectively. Management has not provided guidance so I built my estimate based on my own view of growth and margins by country along with a view to how much the seasonally 1Q has contributed on a country-by-country basis in the past. In other words, my expectations are high but could be way off.

The 1Q call is when CETV historically provides full year guidance. The company has previously provided guidance in the Czech Republic for 2007 and 2008. Based on the sharp jump in 4Q results, very good ratings, and positive management commentary I think that 2007 guidance could jump sharply. Along with continued strong growth in Romania, renewed growth in Slovakia and Slovenia, and lessening losses in Croatia, the stage is set for a good year. Political turmoil in Ukraine and a slight dip in ratings in Romania are the mostly likely areas to provide caution to the guidance. I think guidance will be favorable. My spreadsheet calls for revenues of over $700 million and EBITDA nearing $300 million, representing growth of approximately 20% and 40%, respectively....

Driving growth in 1Q and 2007 will be the Czech Republic where the new strategy at TV Nova is fully implemented. CETV purposefully reset the bar in 1Q06 so that it could use its role as industry leader to establish a modern TV advertising sales market in the Czech Republic. The combination of strong ratings, higher CPMs, higher inventory sellout and stringent expense control, and an easy comparison could lead to revenue and EBITDA growth of 45% and 100%, respectively. I might be too aggressive but I am certain that the growth rates will be very large.

Slovakia is piggybacking on the changes in the Czech Republic and benefiting from CETV having full management control. In 1Q07, growth of over 25% in revenues and a $3 million swing from an EBITDA loss to profits is possible.

Romania should continue to be one of CETV's highest growth markets. I expect some moderation in growth in 1Q from recent gains in the 40-50% range. Ratings are still quite high but have softened a bit but with the overall ad market booming, CETV should still generate revenue and EBITDA growth in Romania of at least 25%.

Slovenia showed signs of life in 4Q06 after new regulations slowed growth for most of the year. I expect another good quarter with revenues and EBITDA growing 15-20%.

Ukraine may show some weakness due to the political turmoil that has engulfed the country. GDP growth remained very healthy so far this year and local economists do not seem too fearful of a slowdown in consumption. Instead, a lull in foreign direct investment is forecast. It is possible that 1Q was fine and 2Q will reveal slower growth. To be conservative, I am assuming that revenue growth in 1Q slowed from the recent range of 30% to just 15%. This would lead to negative operating leverage that could cause EBITDA to drop moderately from a year ago. I could be way off in this forecast or maybe early.

Croatia also showed signs of life in 4Q06 for the first time since the company entered the market a couple of years ago. I am hopeful that 1Q revenue growth will be over 30% following the 60% gain n 4Q. If so, a several million dollar reduction in the EBITDA loss should occur.

Central European Media Enterprises Update

Central European Media Enterprises (CETV) shares had an outstanding first quarter, gaining 26.4%. Part of the gains recouped a $5 decline from mid-November through year end, a bullish period for the market when CETV would be expected to outperform.

Gains this year are tied to several factors. First, fourth quarter results were quite favorable and management was bullish about 2007 prospects on the conference call. Formal guidance won’t be issued until the company reports 1Q 07, likely on May 3rd, consistent with past practice. Second, even before management's comments several Central European based analysts raised estimates for CETV's largest TV station, TV Nova in the Czech Republic, well above previous guidance provided by management in mid-2006. Finally, investors and media industry observers are finally waking up the fact that Central and Eastern Europe offers the prospect for annual advertising gains of 20% plus for the foreseeable future. ZenithOptimedia reiterated its own optimistic in a recent report picked up by BroadbandTV News:

" ZenithOptimedia has identified Central and Eastern Europe as one of two regions containing the world’s fastest growing ad markets. It expects Moldova’s ad market to expand by 185.7% between 2005-9, while those in Romania, Russia and Slovakia will grow by 160.4%, 143.2% and 106.4% respectively. The value of the ad market in Central and Europe, including all media, is meanwhile expected to almost double from $19,160 million (€14,352 million) in 2005 to $33,428 million in 2009. Internet expenditure is the fastest growing in the world as a whole and is expected to account for 8.7% of the total in 2009. This will put it ahead of cinema (0.5%), outdoor (6.0%) and radio (7.9%) but still a long way behind TV (37.6%)."

As a reminder, CETV operates leading TV stations or networks in the Czech Republic, Romania, Ukraine, Slovenia, Slovakia, and Croatia....

CETV shares are presently trading at 13.4 times my estimate of 2007 Attributable EBITDA. Given my expectation for more than 40% growth this year and at least 15-20% in 2008, I don’t find this valuation challenging. Back in its growth heyday, Univision, with a slower EBITDA growth rate consistently commanded an EBITDA multiple of 15 or more. MY CETV target based on 2007 estimates remains $90-100 based on a 14-15 multiple. If management issues the anticipated strong guidance, I'll be willing to look ahead to 2008 where I expect at least 20% EBITDA growth driven partially by Croatia turning to profitability. Croatia receives no value in my current model. Based on my preliminary 2008 estimates, my target price goes up to $110-120.

Besides falling short in execution, which would be a first for CETV management, the primary risk relates to emerging markets exposure. I believe that the volatility of emerging market equities is a greater risk than the political instability. Central and Eastern Europe aren’t going back toward socialist and extremely corrupt governments. However, political stability can cause uneven results and delays in rolling out new stations or new countries.

For example, yesterday afternoon, new elections were called in Ukraine for May 27th as the pro-Western leader of Ukraine's Orange Revolution, has lost control of Parliament to his foe in the Presidential election and an ally of Vladimir Putin. The former communists may not comply with the call for elections leading to a nasty political standoff that might allow them to regain political control in Ukraine. But that won’t greatly impact the rate of advertising growth in the country where GDP is running ahead 7-8% per year and advertising is rising 25-30% annually.

Political turmoil could upset investors though so keep a close eye on CETV to see if any nervous shareholders give you an opportunity to get long. I'll be staying long regardless of the election outcome.

Central European Media Enterprises: Entering Russia?

BroadbandTV News yesterday noted an unconfirmed report in a local Russian newspaper that Central European Media Enterprises (CETV) was negotiating to enter the Russian TV market.

The target is supposedly a music station that competes with MTV Russia. I have no idea if there is any truth to this rumor but if it were accurate, I'd expect CETV to convert the station to more of a general interest channel. CETV does operate specialty channels in Romania and the Czech Republic but those stations are flanker channels to the core general interest channel that is a dominant #1 in prime time ratings.

On its most recent quarterly conference call, CETV specifically identified six countries where it was looking to expand: Russia, Poland, Hungary, Bulgaria, Turkey, and Ukraine. CETV already operates a leading station in Ukraine and is in the start-up phase on two smaller stations. CETV presently has no interest in any of the other countries. CEO Michael Garin stated that CETV is looking for major channels but in large markets like Russia and Turkey acquisition of a niche channel was possible. In hindsight, this comment was likely made to prepare investors for something long the lines of the rumored Russian deal....

CETV can easily finance an acquisition of several hundred million dollars using debt. Year end debt was just over $500 million compared to attributable EBITDA of $200 million. I am presently projecting 2007 EBITDA of around $300 million although management has yet to issue guidance. It is possible that some stock could be used in the acquisition as well.

CETV might have to finance another deal as well. Settlement of a court case involving CETV's local partner in Ukraine has cleared the way for CETV to acquire its partner's interest. There is no guarantee a deal will get done but both parties have expressed an interest in public. A deal in Ukraine could also cost several hundred million.

I think CETV can handle both deals. Ukraine requires no new management time or effort. Russia would be a new market but CETV has some experience in Russian TV via Ukraine and the company went to a regional management structure last year.

Investors would likely cheer both deals. Entry into a large market like Russia opens up another leg of growth for CETV while the Ukraine deal might allow for increased margins, would bring control of the broadcasting license, and would increase attributable EBITDA and free cash flow.

I think CETV shares have acted well given the recent market action. Potential news on the acquisition front and updated guidance due in May provide near-term catalysts. I remain very enthusiastic about CETV shares with a $90-100 2007 price target. Long-term, based on management's forecast of a doubling in company revenues in 4-5 years, I think the shares could double or triple from current levels.

I'll post more on the Russian rumors if any of my contacts can add clarity.

Central European Media Enterprises: Even Better Than Expected

I will likely have some follow-up comments on CETV after I check in with management and my key analyst contacts. Below is my commentary as written immediatley following completion of the conference call. The stock traded off because ivnestors are selling assets exposed to emerging markets risk. I think the quarter shows CETV is even stronger than I expected for the long-term so I'll weather whatever storm the market brings as I honeslty believe CETV shares could double ot triple over the next several years if the company hits my forecasts.

As I expected, Central European Media Enterprises (CETV) reported better than expected 4Q06 earnings. Revenue of $214 million exceeded my estimate of $202 million and EBITDA of $99 million beat my $88 million estimate. Romania and Slovakia had substantial upside surprises, while the Czech Republic, Slovenia, and Croatia also beat expectations. Ukraine was short of my estimates but still showed good growth.

Also as expected, CETV deferred comments on 2007 guidance to the 1Q07 conference call in May. CETV has always provided its annual guidance in May and has never provided quarterly guidance. There were some favorable hints and conclusions that can be drawn about 2007 suggesting that my prior expectations were too low. First, in the Czech Republic the prior 15% revenue guidance was indicated to be a minimum level. Even better it was noted that this is local currency growth. At recent exchange rates, currency is 5% favorable over the course of 2007. Second, management said that Croatia would produce a breakeven quarter in 2008 and for the full year of 2009. The tone of comments about Croatia which has been a lagging turnaround was much improved. Third, management feels that TV advertising in Ukraine would be in the 30-35% range in 2007, up from 28-30% in 2006. Management expects CETV to maintain its market share despite a competitive environment. Fourth, the upside surprise in Slovakia looks sustainable and management feels that there is a lot more good news to come from this market. CETV gained full management control of the station in 2006. Finally, management reiterated its long-term growth goal of doubling revenues in 4-5 years with slight margin expansion. This is organic growth solely form the current station group.....

There were a few other key news items from the call:

• CETV's local partner in Ukraine won his case over an ownership dispute. No further appeals are available. This means that CETV is much closer to increasing its economic ownership from 60% and gaining control of the license.
• Management indicated it is looking for acquisitions and specified Russia, Poland, Hungary, Bulgaria, Russia, and Turkey. I didn’t get the impression anything was imminent but this was a more explicit comment that in the past.
• Management would consider adding production assets, especially in Russia and Ukraine.
• €125 million in bonds are likely to be called in May. These bonds are floaters with a current interest rate of 8.5%.

Overall, this was a routine quarter for CETV offering outstanding growth, excellent execution, and superior disclosure. Relative to prior quarters I found things less volatile as far as individual country upside/downside.

I see nothing in the 4Q06 results or commentary that makes me less bullish on CETV. It is my single best idea for near-term and long-term growth. The multiple is quite reasonable, especially against a 15-20% 5 year forward revenue growth rate. If CETV hits those numbers, I think the stock will double or triple from current levels. In the short-term the shares will be impacted by investor sentiment toward emerging markets but I would be using current weakness and any further weakness to buy more shares. I added a tiny bit this morning and would have added more if my position were not full. CETV remains my largest position away from my ETF rotation strategy. I think the shares are headed to $90-100 this year assuming the market cooperates.

Expecting A Strong Quarter From Central European Media Enterprises

Central European Media Enterprises (CETV) should report robust 4Q06 growth. I am forecasting revenues to rise 17% and EBITDA to grow 22%. Strong ratings in 2H06, a return to positive comparisons in the Czech Republic, improved execution in the Czech Republic, and favorable currency comparisons support the growth profile.

CETV shares are up about 15% this year despite getting shellacked for 8% in the last two days. CETV shares often trade up aggressively ahead of earnings and then sell off sharply following earnings regardless of the news. A 15% gain certainly qualifies a strong up move but maybe the recent sell-off will allow the shares to rally if the company reports a clean quarter and offer encouraging 2007 commentary as I suspect.

The biggest swing factor and focus of investor attention will be on TV Nova in the Czech Republic. Earlier this year, CETV reset the operating strategy and expectations for TV Nova. The goal was to improve ad pricing in the Czech Republic which was unchanged since 1999 despite great growth in the economy. Nova's competitor initially decided to steal market share by not raising prices. In the new TV season that began last fall, the price increases held and Nova's rating surged. I think it is possible that Nova will surprise significantly to the upside in 4Q relative to expectations included in the table below......

CETV doesn't usually offer guidance until the 1Q call in May. However, I think there is some pressure to update guidance in the Czech Republic, especially if I am correct that an upside surprise is coming. Several analysts have already raised 2007 EBITDA estimates for Nova to $150-160 million vs. guidance issued last summer of $135 million. If CETV refuses to endorse higher numbers the stock will probably sell-off. Currency again is looking like a significant benefit putting further upward pressure on the guidance.

Here are my estimates for 4Q06 on a country by country basis excluding a start-up network in Ukraine that will lose several million dollars in 4Q on less than $1 million in revenue. Following each country is the expected revenue, the revenue growth rate, expected operating cash flow, and the expected operating cash flow growth rate:

Romania: 49,062 34.3% 22,244 24.7%
Slovak Republic: 23,853 17.6% 9,742 56.2%
Slovenia: 16,117 -6.6% 6,312 -30.9%
Ukraine: 35,329 25.7% 16,353 35.9%
Czech Republic: 70,000 7.1% 39,000 24.5%
Croatia: 7,255 38.5% (5,361) -15.2%
Total: 201,616 16.7% 88,290 21.7%

The big EBITDA gain in Slovakia is tied to the turnaround in the Czech Republic as these tow countries are using similar operating strategies. I think my estimates in Slovenia may prove low as local tax issues that pressured results earlier this year have abated. Romania and Ukraine remain key growth drivers but the results can be volatile from quarter to quarter depending on the timing of programming.

For 2007, I am forecasting a 20% revenue gain and 40% growth in EBITDA. These figures would be before any increase in guidance for the Czech Republic. I expect continued growth of 20-30% in Romania and Ukraine, a return to growth in Slovenia, a lessening of losses at the start-up in Croatia, and the turnaround in the Czech Republic to hit full stride.

Besides the guidance for Nova in 2007, questions that could come up on the call include recent rating trends and potential acquisitions. Ratings in Romania, Ukraine, and the Czech Republic turned downward late in 4Q. Part of the downturn was due to cannibalization of viewers by flanker channels owned by CETV. Ratings have rebounded in early 2007 and historically there is not a great correlation between ratings and revenue as overall market growth has been the key driver. However, competition is getting a little tougher so I am anxious to hear management's commentary related to the recent ratings volatility.

With 2007 EBITDA approaching or exceeding $300 million, CETV's balance sheet is getting underleveraged at just 1.5 times EBITDA. Using this capacity for further acquisition in Central and Eastern Europe is possible. Management would buy more assets if the price is right and acquisition activity in the region has been high. Some of the balance sheet capacity is clearly reserved to increase ownership and take control of the license in Ukraine. This all but a done deal but a lawsuit involving CETV's local partner has got things hung up. Any shift in management's commentary about the acquisition environment would be a big deal.

CETV shares are trading about 13 times 2007 estimated EBITDA. Given the growth rate and the attractiveness of CETV as an acquisition target for a larger media company, I find this valuation compelling. Univision was taken private at about 16 times EBITDA and always traded at around 14 times. I think CETV deserves a similar multiple as the growth rate is much higher, compensating for the valuation discount given to emerging markets.

I think the shares have upside to $90-100 on 2007 estimates and $120 plus on 2008 estimates. A takeout of CETV would have be north of $120 to satisfy me and Apax Partners, a private equity firm that bought out half of Ronald Lauder's controlling stake last August. In fact, Apax has blocking right son any deal less than $120. I think that gives investors a good idea of what a very smart insider thinks these shares could worth in the next few years. I couldn’t agree more.

Central European Media Enterprises: I Have Company For My $100 Target

Central European Media Enterprises (CETV) broker out to new highs this week following an upgrade from Czech-based analyst Tibor Bokor of Wood Company. Tibor sharply raised his estimates for 2007 and 2008 and increased his price target to $100. Tibor's new optimism is based on his analysis of the likely 2007 and 2008 resutls for CETV's largest TV station, TV Nova in the Czech Republic. Tibor has established EBITDA estimates for Nova in 2007 and 2008 of $160 million and $212 million, respectively, versus his prior estimates of $109 million and $135 million and management guidance of $135 million and $170 million. In other words, Tibor has gone from a bear to a raging bull on CETV's largest asset which will account for around 50% of estimated 2007 EBITDA....

As a reminder, CETV acquired Nova is 2005 for about $900 million. In early 2006, a change in Nova's advertising sales strategy was implemented that caused 2006 EBITDA to decline as estimated 20% from 2005. Management promised renewed growth beginning in 2007 with another big year in 2008. The major reason for the strategy change was that TV advertising rates in the Czech Republic were unchanged from 1999 despite significant growth in GDP. Unfortunately, the timing of Nova's shift was poor as the network had a highly unusual hiccup in its dominant ratings performance. Nova's #1 competitor gained share and then undercut Nova's attempt to raise prices.

Advertisers were always willing to accept some price increases in the Czech Republic as they were well aware TV advertising was significantly underpriced. In the second half of 2006, Nova's ratings dominance returned and the station's position with advertisers was re-established. The timing is now working in Nova's favor as state-owned TV stations are required by law to begin to eliminate commercials in 2007. Additionally, the launch of digital channels has been delayed at least one year, keeping another competitor out of the market.

Tibor was initially concerned that Nova's strategy change would backfire on a long-term basis. That was something I was never worried about given my experience with the CETV management which ahs always delivered as promised. Tibor now sees that the strategy decision is going to work so he lifted his market share for Nova by 10% in a TV ad market that is expected to grow by 7-8% in 2007. US investors further benefit form the fact that the Czech Koruna is presently aobut 7% stronger vs. the U.S. dollar than a year ago.

Put all this together, and Tibor's assumption that Nova's EBITDA will grow by more than 60% in 2007 and 32% in 2008 is very plausible. Further confirmation of the above guidance forecast could come in early March when I expect CETV to announce that Nova has beaten the upwardly revised guidance of $95 million in EBITDA for 2006.

Strong performance by Nova in 2007 and continued growth north of 20% for CETV's stations in Ukraine, Romania, Slovenia, and Slovakia easily justify the recent move in the shares. I stand by my long-time target of $100 for CETV in 2007. And if the company tracks toward the 2008 estimates in my spreadsheet, there is plenty of upside beyond $100. For now though, it is nice to have some company at $100.

Good Quarter For CETV But Someone is Unhappy

Despite the extremely negative stock price action, I found Central European Media Enterprises (CETV) Q06 earnings report to be quite good. Good enough, in fact, to use the weakness to add CETV to some brand new accounts. I have spoken with company, several street analysts, and one of the major shareholders and all agree that there is nothing in the earnings that would account for the decline in the stock. I think it is just a "sell the news" reaction to a stock that has risen by 40% since the July lows.

CETV reported revenue growth of 14% and segment EBITDA growth of 23%. EPS were 15 cents, well ahead of consensus but boosted by favorable foreign exchange and a one0time gain. EBITDA margins expanded by 300 basis points to 23%, ahead of my expectations and alleviating one of my few concerns about the CETV story....

Romania was once again the star for CETV with revenues rising 39% and EBITDA rising 50% as margins expanded sharply. Ratings in Romania ticked up in the third quarter and the company's multichannel strategy is allowing the CETV to gain share in a very rapidly growing advertising market.

Slovakia and Slovenia were all quite storng in the quarter and exceed my expectations. Slovakia had revenue growth of 19% with EBITDA almost doubling. New management at this station has been hinting that results had the potential to tick up sharply and it looks 3Q was the inflection point. Slovenia continues to be a steady performer with revenues and EBITDA each growing 19%. Easy comparisons against tax impacted weakness in 2005 and strict cost controls drove the quarter.

The critical Czech market looked good as well. As expected following the reset of ad sales strategy that led to sharply declining revenues in the first half, 3Q saw revenues flat vs. a year ago. Previously promised cost controls and lower programming expenses translated into a resumption of EBITDA growth, which rose 44% vs. a year ago. Management did not raise full year guidance but looking at the nine month results and huge ratings increases in the current TV season, the implied 4Q guidance looks conservative. Management also commented on 2007 in the Czech Republic after a series of tough questions from a single analyst. Previously provided guidance for 20% revenue growth and 40% EBITDA growth was affirmed. Given what I think will be a higher 2006 base, strong ratings, and evidence that cost controls are working, I think the 2007 guidance of $230 million in revenue and $135 million in EBITDA looks conservative.

Results in Ukraine fell short of my expectations and management's budget in 3Q. Management attributed the 18% revenue gain and unexpected $1 million EBITDA loss to advertiser hesitation as the formation of the new government dragged on through the summer. The new government was formed in September and management that there has been a "strong bounce back" and improved CPMs since that event. Despite the weaker than expected 3Q, Ukraine's 9 month results still show 39% revenue growth and 64% EBITDA growth. I expect Ukraine to return to 25-35% revenue growth with margin expansion independent of the continuing investment in startup networks. Given the 50 million population and similarities to Romania, I am pleased that management is continuing to invest in Ukraine. A separate positive in Ukraine is that the company's local partner won a round in a court dispute over establishing his legal standing as co-owner of the station. CETV is not a party to this dispute but would just assume continue working with its current partner. The dispute has no impact on CETV's ownership or license.

The only other negative I see in the quarter that could account for the decline in the stock is the company's announcement that if found some minor problems with stock options that were granted from 1994 to 1998. The company restated its 2005 financials but the impacts was just a $126,000 increase in operating expenses. I don’t see this as material. Furthermore, given my long experience with this company I have no reason to believe that there is anything worse coming given the reassurances provided by management in the press release and on the call.

I remain very bullish on CETV and think that 4Q06 implied guidance and 2007 analyst estimates are too low. If I am correct, I think CETV shares will trade to $90-100 by mid-2007. CETV remains my largest non-ETF position in my client and personal accounts.

Looking For A Good Quarter and Optimistic Guidance from CETV

Tomorrow, I expect Central European Media Enterprises (CETV) to report another strong quarter in its seasonally weak 3Q. Romania and Ukraine will again be the growth engines but the big story will be the turnaround at TV Nova in the Czech Republic. In 1H06, CETV reset expectations and initiated a new strategy at Nova designed to insure long-term growth by raising advertising prices and modernizing the advertising market in the Czech Republic. Prices are largely unchanged since 1999 despite massive growth in the Czech economy. The reset caused 1H06 revenue and profit to fall by 25% and 40%, respectively, in CETV's largest market. At its September analyst meeting, CETV raised guidance at Nova and the implied 3Q guidance would call for flat revenue growth and rising EBITDA. Since that meeting, Nova has continued with excellent ratings performance so I expect a good result in this crucial market. In fact, I think it is possible that 2006 guidance for Nova will be raised further. The company is already on record with solid double digit growth guidance for Nova in 2007 and 2008. I would expect that guidance to be maintained although the absolute revenue and EBITDA projections look conservative. It is just too early to increase out year numbers....

With Romania and Ukraine likely to continue growth in the 20-30% range and Slovakia to accelerate with a tailwind from the Czech Republic, CETV looks poised to continue growing very rapidly. I expect corporate revenue growth of over 20% in 2007 with the big turn at Nova leading to EBITDA growth of over 40%. This type of growth in traditional media is not available in any other public company and CETV shares are deserving of a premium valuation similar to where < b>Univision (UVN) has historically traded. At a mid-teen's EBITDA multiple on my 2007 estimates, CETV shares are worth over $90.

There are a couple of other things to keep mind regarding 3Q. First, margins in the seasonally strong 2Q were a little lower than I expected. CETV seems to be investing in local content to sustain its ratings leadership. I see no problem with this but if margin pressure grew I might adjust my long-term EBTIDA growth downward. Second, at its September meeting, CETV announced a new small network launch in Ukraine that will produce about a $4 million loss this year. I also have no problem with this as Ukraine has huge upside potential (its population is 70% larger than Romania but 2006 EBITDA will be less than half of Romania). The general manager of the Ukraine operation seemed very confident that losses would recede sharply in 2007 but I think it is possible that further network launches in Ukraine are possible. Finally, CETV's one failure so far has been in Croatia where greater than expected losses have been incurred. I am not sure how much patience the company has for losses in Croatia although relative to the larger corporate entity the absolute dollar amounts are not large. I hope for an update on the 2007 plan in Croatia.

Overall, I expect a good quarter with a strong possibility that guidance goes up further for 2006. CETV shares are on a roll. They put in a nice bottom over the summer when Apax Partners agreed to buy half of Ronald Lauder's control stake at $60. Apax is a top tier private equity firm and they didn’t buy into CETV looking for 30%. In fact, the agreement with Lauder gives them the right to reject buyout bids at less than $120 for the next three years. I think that gives us an idea of what upside they expect in CETV. I agree.

Central European Media Enterprises In NY Times and Wall Street Journal

Yesterday’s New York Times had a major article about Ronald Lauder’s investment in Central European Media Enterprises (CETV). In an odd coincidence, the Wall Street Journal had an article the same day about the attractive television markets in Central and Eastern Europe. My good friend and major CETV shareholder, Mark Riely, was mentioned in both articles. Kudos to Mark for hitting two such prestigious papers in the same day!

I suspect that the genesis of these articles may have been CETV’s September analyst meeting in New York City. In fact, I went up and introduced myself to Lauder at the meeting by interjecting myself into a conversation he was having with a woman who turned out to be the New York Times reporter who wrote the story, Geraldine Fabrikant.....

I have always been curious about financial journalists who listen to conference calls and attend analyst meetings and Wall Street conferences. It is no shock that good journalists see these events as places where they can get a good story. I guess what never crossed my mind before was that company’s can use these same events to spread the word about their stocks. I know that sounds naïve coming from a money manager with 25 years experience but press relations is an important corporate function that is often overlooked.

As for the articles, both laid out my bull case for CETV – advertising markets in Central and Eastern Europe are growing very rapidly as major corporations attempt to establish their brands in quickly developing consumer economies. Add in increasing stability in the political, economic, tax, and regulatory environment and the fact that most consumers/TV viewers in these markets only watch a handful of state-owned and private stations or networks and you have a very attractive market business opportunity.

The only downside to the Central and Eastern Europe television story is that it is beginning to attract increasing amounts of capital. For CETV, this means acquisitions are more expensive and that it faces better competitors which will require more investment in the local operations to maintain ratings.

For the next few years I don’t see that as a problem as overall region ad growth in the 15-20% range leaves plenty for all concerned. Further, if Lauder is ever willing to sell the rest of his control stake in CETV, I’ll be really happy that acquisition multiples have been bid up.

The bottom line is that these two articles provide a thumbnail of the reasoning behind recent decision to invest $190 million in CETV by purchasing half of Lauder’s stake. Apax has a pretty good track record and is certainly smart money. I am still adding to CETV for all my new clients even with the stock at close to record highs.

Central European Media Enterprises: Analyst Meeting Goes Well and Affirms Near-Term and Long-Term Upside

I spent last Thursday at the annual analyst meeting for Central European Media Enterprises (CETV). The news was good as CETV slightly raised EBITDA guidance due to more rapid than expected improvement at TV Nova in the Czech Republic. Results at this station are the most critical aspect of the CETV story for the next several quarters, so the increased guidance is a strong positive. The company also reaffirmed guidance at its core four stations in Slovenia, Slovakia, Romania, and Ukraine. Romania and Ukraine remain the long-term growth engines so affirmation of guidance in these high growth markets is also good news for investors. Below is a detailed recap of the analyst meeting:

This year’s meeting was in NY. All the previous meetings had been in Europe, so this was my first time attending. CEO Michael Garin stated that with 82% of the shareholdings are in the US so it was time to hold the meeting here. There were about 100 people in attendance, an amount I found to be surprisingly high. CFO Wallace Macmillan told me that in the prior meetings in Europe attendance was generally around 40 people with a majority from European institutions.

The meeting agenda had Garin giving an overview followed by presentations from the operating managers in each individual country. Each presentation recapped general economic information on the country, its advertising market, and its political environment. Updated 2006 guidance was also provided for each country.

Overall, management maintained EBITDA guidance for the 2006. However, adjusting for a few items, EBITDA guidance actually went up by $5 million. All of the increase is due to TV Nova in the Czech Republic. This is by far the company’s largest business (about 40% of EBTIDA) and following the introduction of a new strategy that was one big step back (2006) followed by two huge steps forward (2007 and 2008), the guidance increase was very welcome. The key takeaway is that the new strategy appears to be working and previously provided detailed guidance for Nova for the next two years looks extremely realistic, if not low. Additionally, Nova’s ratings are off to a great for the fall TV season, while its primary competitor is not delivering its ratings guarantees. If those trends hold, the new guidance still has upside.

For the core four stations of Romania, Ukraine, Slovenia, and Slovakia, management maintained guidance for 2006 EBITDA of $130 million....

I was actually hoping these four stations would produce closer to $135 million. I still think that is possible, especially since revenue guidance at these four stations is now $14 million above my prior estimate. Essentially, the company appears to be reinvesting in locally produced programming in order to secure its market share leadership in these markets. A bear might say that these markets are becoming more competitive but given the underlying growth rate of advertising expenditures in each market, I think that sacrificing a little margin is a smart move. The company showed ratings data for the first few days of the fall season in each market which might suggest that the EBITDA guidance is conservative but it is too soon in the new season to extrapolate. If ratings hold, I expect the company might be willing to slightly raise guidance on the third quarter conference call.

CETV did state that losses in Croatia would be $1 million higher than expected. This has been a difficult market for CETV as it is attempting a startup vs. well established commercial and state competitors. Ratings are coming up following lots of investment but the general manager of the station told me that he didn’t expect losses to moderate in 2007 although revenues should gain. He appears to believe in the upside and is willing to bet that he can raise ratings further and possibly even take top market share. I wonder whether the Board is willing to endure the losses in Croatia but given past success in similar countries I think they will tough it out.

Another $4 million in losses will be incurred in Ukraine as the company launches a second network. These losses should drop sharply next year according to the head of the station. Ukraine is an enormous opportunity with 47 million people and per capita advertising expenditures of just $6. I am strongly in favor of additional investment in this market.

While CETV appears to be continuing its multiyear run of superior operating results, investors should stay focused on the long-term opportunity. The company presently serves six countries with a population of 91 million. As a group, the six countries produce GDP of about $430 billion with growth rates of 4-6% this year. Advertising spending is growing very rapidly in these markets (Ukraine and Romania +30%, Slovakia +10%, Croatia +10%) driven by rapid foreign direct investment and rising wages and incomes. Per capita advertising in CETV’s markets averages just $11 vs. $27 for all of Central Europe and $74 for Western Europe.

CETV is a direct, pure play on rapidly developing consumer economies in Central and Eastern Europe. Investors can access this growth by investing in CETV which is a US company with GAAP accounting and incredibly detailed quarterly financial disclosure. CETV is the only true organic growth stock in traditional media, more than compensating for the emerging markets risk. I think the shares will double again in the next two to three years.

Ronald Lauder Sells Half Of His Control Position in CETV

Apparently, Ronald Lauder has decided to pay for his $135 million acquisition of Gustav Klimt’s Adele Bloch-Bauer I by monetizing half of his 15.8% stake in Central European Media Enterprises (CETV). Last June, it was revealed that Lauder was buying the Klimt and paying the highest price ever for a painting, easily exceeding the $104 million purchase of Picasso at a Sotheby’s auction in 2004. OK, it might just be coincidence that Lauder is raising $190 million through the sale of half his CETV stake. Nevertheless, for us CETV collectors, I mean shareholders, this event could prove as significant as the Klimt was purchase was to the art world.

Lauder is forming a partnership with top tier private equity firm Apax Partners. Apax will pay Lauder $190 million for 49.72% of the partnership which will have a 15.7% economic interest and 64.8% voting control of CETV. Lauder is putting virtually all of his personal and family holdings of CETV into the partnership. The 13-D filing indicates that Apax is paying $60 per share, a slight premium to CETV’s prior close of $58.26....

My initial thought on this news was that it was positive for CETV shareholders despite the fact that a major insider was selling at current prices. I have always feared that Lauder’s interests in CETV could diverge from minority shareholders. Bringing in a top tier private equity firm at a slight premium adds a new and powerful voice that would seem to be sympathetic to minority shareholders. Additionally, Apax isn’t in this for fun. Obviously, they expect to make a substantial return on their $190 million investment. Another media focused money manager I know sums it up well:

After reading more about this, I think it's a more than a "glass half full" event for the stock. A private equity firm taking a "pole position" in the B-stock (super voting) would indicate to me an eventual increased involvement by them and/or other private equity firms, and they are sophisticated enough to have closely looked at the plan, and obviously liked it. Lauder cutting his stake in half would otherwise be seen as a negative ("glass half empty"), but he sold to "smart money".

As I read through the 13-D, some questions arise about technicalities related to voting and blocking rights of Lauder and Apax. However, even if these technicalities cause concern -- I’m not sure they do -- I feel that minority shareholders are better served by this deal than by some other options Lauder had to monetize his CETV position.

If Lauder was determined to raise cash via monetizing CETV he could have sold the whole company. While putting CETV up for sale certainly would have brought a large and immediate premium, given the company's track record and growth opportunities, I suspect any deal would have left money on the table.

At a Univision (UVN) multiple, CETV would bring in over $100 per share but who is to say that the current deal environment would have gotten bids that high. $85 or $90 would be a huge win but I'm willing to bet that Apax didn’t buy in at $60 with an upside target of $90. In fact, for the next three years, Apax has the right to block a sale of CETV for les than $120!

Lauder could also have raised cash by selling his shares through a secondary offering. This clearly would have depressed the shares, probably taking them back to recent prices in the low $50s. And the lingering message would be that the most important insider was a seller.

So in the end, the Apax-Lauder deal seems like a good one. A "smart money" buyer used to private equity size returns is taking a significant stake. Apax is more likely to align its interests with minority shareholders than Lauder, who has signaled a willingness to be a seller at the right price, something many doubted.

Put it all together and I find the CETV story better today than yesterday. And the stage is set for a very interesting analyst meeting in New York on September 21. I'll be attending.

Central European Media Enterprises: Good News From Czech Republic

Central European Media Enterprises (CETV) reported solid 2Q06 results, comfortably matching my expectations. As usual, the composition of results was a little different than what I expected but the bottom line is that the quarter affirms my enthusiasm for CETV, especially relative to current expectations for 2007.

CETV shares are quite weak despite what I see as good results. I found one Reuters story quoting a Czech-based analyst which said that results “lagged forecasts.” I disagree. Additionally, on the call, CEO Michael Garin took the unusual step of calling out a negative report from DB Securities that came out before the call. Garin noted that the report had factual errors regarding 2Q06 guidance for the Czech Republic. I have not seen the report but based on what Garin said, I would have to agree. I think that these two factors are coloring the initial reaction to CETV’s results. I strongly believe the downdraft is wrong and will be reversed in coming days and weeks....

Overall, CETV reported segments revenues of $157 million and segment EBITDA of $63 million. I had been expecting revenues of $141 million and EBITDA of $58 million. I am aware of one other analyst who was higher but the Reuters story quoted an EBITDA consensus of $63 million, so I don’t really see any miss.

Looking deeper, the results in the Czech Republic were much better than expected, revenues at the four core stations were in line, and margins at the four core were a little light. As far as CETV’s share price performance over the next year is concerned, I think the good news in the Czech Republic far outweighs any possible shortfall in margins at the core four.

In the Czech Republic, CETV is repositioning TV Nova. The strategy caused a near-term hit to revenues and EBITDA but management provided detailed guidance for 2H06, 2007, and 2008 which showed major growth off the lower base. Meeting this guidance was the primary risk to the CETV story, so the fact that 2Q saw revenues and EBITDA of $56 million and $28 million vs. guidance of $42 million and $21 million is extremely comforting. Management chose not to raise guidance for 2006 in the Czech Republic pending a look at the seasonally large 4Q, but I am quite confident numbers will go up at Nova. Nova accounts for about 40% of CETV so any positive news here is significant.

The core four of Slovenia, Slovakia, Romania, and Ukraine met revenue expectations with growth of 22%. Margins contracted slightly in all four countries, however, so EBITDA grew 16% vs. my expectation of 21%. 1Q results in these markets were unusually strong so 1H results remain on track toward meeting full year guidance which was affirmed on the call. Management again reminded investors that quarterly results are quite volatile due to the timing and success of programming and cost initiatives. There have been many instances in the five years I have owned this stock when individual quarters in individual countries were unusually weak or strong . Extrapolating any individual quarter is a mistake.

There was some bad news in Croatia which is less than 5% of revenues. This start-up will see its EBITDA breakeven pushed out until 2009 from prior guidance of 2008. Ratings have been good but translating ratings to revenues is proving more difficult than expected.

Lastly, CETV announced that COO Robey Burke is retiring. There is nothing sinister here. Robey is an excellent person and can be trusted when he says being a London-based COO for a company with operations scattered throughout Central and Eastern Europe requires more travel than he desires at this stage is his life. Robey had informed the company of his plans early in 2006 and in hindsight many of the management changes and promotions announced since then now make total sense.

I stand by all my expectations for CETV’s financial performance and stock price following the 2Q results and have increased confidence in corporate targets for 2007 given the turnaround in the Czech Republic is proceeding so well.

Central European Media Enterprises Earnings Preview

Due technology issues the following post is being added now even though it was written over 24 hours ago

2Q06 will be a tricky quarter to analyze for Central European Media Enterprises primarily due to the repositioning of its largest station, TV Nova in the Czech Republic. Self-induced changes will push Nova’s year-over-year comparisons deeply negative and as the largest station in the company drag total company comparisons negative. Nova will mask excellent growth in other countries which should be the focus of investors given detailed guidance for Nova’s recovery was provided on the last conference call.

CETV initiated a new strategic direction for Nova this this year after acquiring the station in spring 2005. Nova aggressively raised rates and moved to a modern inventory management system. This was the first attempt at a price increase since the 1990s. Advertisers initially resisted and moved to CETV’s lower rated competitor. CETV has since settled with advertisers and according to local news articles from Prague, it appears that the Czech TV advertising market is responding to CETV’s attempts to modernize it. The Czech Republic is far along in its transition toward becoming an industrialized economy and advertisers appear to agree with CETV’s attempts to bring Western European standards to the advertising sales process....

Unfortunately, the transition means that CETV’s results in the Czech Republic will be under severe pressure this year. This is not news and was well explained by management on the last conference call. On that call management provided full year guidance for the company and for Nova but no quarterly guidance was provided. Analyst coverage is limited so my expectation for Nova to produce revenues of $43 million and EBITDA of $17 million, declines of 41% and 58%, respectively, may not be consistent with whatever estimates exist. TO reiterate, this should be expected by analysts and portfolio managers involved with CETV.

The sharp, self-induced decline at Nova will pull overall revenue and EBITDA growth into negative territory as well. I expect CETV to report overall revenue of $140 million and EBITDA of $52 million. Honestly, I am not sure what street analysts are expecting. Besides the changes at Nova, further investment in Croatia also will contribute to the poor comparison. However, excluding these factors, growth at the four core stations in Romania, Ukraine, Slovenia, and Slovakia should be healthy. I expect revenue growth of 17% and EBITDA growth of 21% in these countries driven by continued growth of 25-30% or more in Ukraine and Romania.

With well established and previously successful local strategies in place in the Czech Republic and Croatia, investors should focus on the growth of the core four stations in assessing the attractiveness of CETV as an investment. The Czech Republic will return to growth in 2007, possibly even in 4Q06, while Croatia losses should peak this year. Consequently, CETV’s growth outlook for 2007 and 2008 is exceptional. I expect revenue growth of 15-20% in each year and faster EBITDA growth as margins expand.

This profile makes CETV a growth stock in any industry and possibly the only growth stock in traditional media now that Univision (UVN) is being taken private. Following its pullback in sympathy with the shellacking in the emerging markets, CETV is trading at 10 times my 2007 estimate, just a modest premium to mature companies likes Disney (DIS) and News Corporation (NWS) with healthy fundamentals. Were CETV to move to 12 times 2007 EBITDA, the stock would trade back to its old highs in the lows $70s, up 20% from current prices. Valued at the same multiple as the UVN buyout, CETV would trade to $100. CETV shares are unusually volatile due to light trading volume and the emerging markets exposure but if you can handle the volatility, the shares are poised to continue to their multi-year run.

Univision Sale Supports Upside in CETV But Has Few Other Ramifications

The Univision (UVN) auction came grinding to an end with announcement that the company would be sold for $36.50 per share or $12.3 billion. The private equity financed buyers will also assume debt of $1.4 billion. After adjusting for acash and other assets, the total value of the deal is about $13 billion. Analysts estimate that UVN will have EBITDA in 2006 of about $800 million. Thus, the EBITDA multiple on the deal is about 16.2 times.

Based on initial estimates and media commentary a sale price of $36.50 is considered to be a poor outcome as many thought the company might fetch $40 or more per share. The perception of a weak auction was furthered by the apparent falling apart of the bidding group that included Grupo Televisa (TV).

However, I'd characterize the outcome of the UVN auction as "pretty solid." After all, 16 times current year EBITDA is a huge premium to where any other traditional media asset in the world is currently trading. At $40, the multiple would have been just short of 18 times, or roughly twice the multiple of any other media stock can name. I think the slight disappointment in pricing is attributable to rising interest rates (financing cost are up 50 basis points at least since the auction began), a tricky path to regulatory approval for TV's group, lack of bidders among the media conglomerates who are either divesting assets or just finishing acquisitions, and an acknowledgement that UVN's growth is moderating toward low double digits from 20% plus. The bottom line is I wouldn’t call a 16 multiple a failure. Rather, I consider it a fair price for a great asset....

I don’t see a lot of ramifications for other media stocks as a result of the UVN deal. In terms of US assets, UVN is a one of a kind company. I guess I feel better about management capital allocation and corporate strategy decisions at Disney (DIS) or CBS (CBS) or other entertainment conglomerates in that they held to their current business plans. Tribune (TRB) and News Corp (NWS.a) are rumored to be considering sale of broadcasting assets but UVN's stations that serve fast growing and rising income Hispanic audiences are worth far more than mature affiliates of the major networks or new nets like the CW.

I do stand by my prior posts that said that my long-time favorite, Central European Media Enterprises (CETV), is worth the same multiple as UVN. The market has traditionally not paid anywhere near the multiple for CETV that it did for UVN. However as CETV has grown via acquisition toward $200 million (2006) and then $300 million (2007) in segment EBITDA, I think the comparisons gain more support. Granted, US investors are unlikely to pay a full multiple for CETV given the emerging markets risk. However, if CETV hits my estimates it is trading at just 10 times 2007 EBITDA.

If Ronald Lauder, CETV's controlling shareholder, took the same path as UVN controlling shareholder Jerrold Perenchio, and put CETV up for sale one year from now, I'd be willing to bet that CETV would fetch a multiple darn close to UVN's sale price. CETV presently reaches 90 million people, far more than UVN, and the company has outlined a multi-year growth plan for sustained 15-20% EBITDA growth. Given the paucity of true growth assets in media, I think that profile could earn a mid-teens multiple for another one-of-a-kind asset. Furthermore, there would be no bidding complications for any of the major global entertainment conglomerates.

At 16 times my 2007 estimate, which is built off detailed management guidance, CETV would be trading at $100. I don’t expect a sale but I think the UVN deal provides great support for CETV at current trading levels of 10 times EBITDA or $60.

Central European Media Enterprises: Croatia For Sale?

This story from BroadbandTVNews.com caught my eye:

The Serbian Pink media group has set its sights on the Croatian national commercial station Nova TV. Speaking during a visit to Zagreb, the group’s owner Zeljko Mitrovic said he had sent a letter of intent to the owners of Central European Media Enterprises (CETV) backed Nova TV containing a “good offer” and that he would be opening a production company in Croatia this autumn. Pink’s interests currently include the national commercial station TV Pink and satellite channels Pink Plus and Pink Extra in Serbia, along with several TV stations in Bosnia & Herzegovina. Mitrovic added that Marija Nemcic, currently the head of the public broadcaster HRT, would head the group’s interests in Croatia.

CETV responded to press inquiries as follows:

"Wishing to comment on recent media reports in Croatia related to the possible acquisition of Nova TV, CME wishes to state that no offers were received officially and no talks are currently under way with any potential buyers of Nova TV," said the statement.....

I'd be shocked if CETV was willing to sell Croatia (and equally shocked if a Serbian entity bought a Croatian TV media outlet) because long-term upside in this asset is substantial. It could easily be worth several hundred million in the 2008/2009 time frame if EBITDA margins move anywhere close to other CETV markets. Nevertheless, let's take a closer look.

Croatia lost $16 million on the EBITDA line in 2005 and is projected to lose a similar amount in 2006. Losses should drop sharply in 2007 with the possibility of reaching breakeven late in the year. In 2005, when CETV had partial ownership, Croatia lost about $4 million. The company paid about $24 million for the station, so all in the total investment in the station so far is about $60 million.

Despite the losses, in my model I value Croatia at $0 by eliminating the losses from my EBITDA calculation. The reason I do this is because news such as this speculation about a possible offer for the station shows that value exists despite the losses. Sum-of-the-parts is an often derided valuation tool but here is an example of why it can be helpful.

According to my estimates CETV is trading at 10.2 times 2007 estimated EBITDA including the Croatia losses. If Croatia were to lose $10 million next year that means that including the losses in EBITDA reduces the theoretical enterprise value of CETV by over $100 million or $2.50 per share. Is that fair? I'd say obviously not given that apparently there is a buyer for the station.

CETV shares have fallen back in line with many emerging markets over the last few weeks. I think it is an excellent buying opportunity.

Does The Emerging Markets Sell-Off Indicate Their Run Is Over?

In a post yesterday on Real Money, my colleague Jim Cramer noted that despite massive sell-offs in equity markets in Brazil and India, he wasn't yet seeing any real weakness in the fundamentals for either economy. I think Jim's comments probably go beyond Brazil and India to include most other emerging markets.

Of course, a financial contagion could easily lead to deterioration in emerging market economies, so Jim's comments should probably include a big "so far" qualifier. Among other things, growth in these economies is being driven by cheap capital. Collapsing equity markets could halt or significantly raise the price of the capital inflow which undermines economic growth and recent currency strength (I still take comfort in the much more stable action in emerging market currencies relative to emerging market stocks).

My almost five year old position in Central European Media Enterprises (CETV) has led me to focus mostly on emerging markets in Central and Eastern Europe. These economies are being driven by low cost labor and infrastructure, increased political stability, new regulatory and legal laws, non-intrusive tax systems, and rapidly growing consumer economies. A stock market meltdown could undermine some of these trends but I think they will prove durable.

In support of Jim's contention that economic fundamentals look a lot better than recent stock market action, I pulled the following excerpts from a recap of an investment conference that Dragon Capital recently held for leading companies in Ukraine. Dragon is the largest broker in Ukraine according to their own press releases....

• Ukraine finished 2005 as Europe’s 12th largest and fastest growing market by car sales (25% y-o-y). Based on April statistics, the country advanced to ninth place. In 1Q06, domestic car output rose by 35% y-o-y, to 54,900. vehicles, and total car sales surged by 45% y-o-y, to 67,700 vehicles. Full-year car sales are projected at 330,000 vehicles. Russian VAZ, Ukrainian ZAZ and South Korean models (Daewoo and Chevrolet) remained the most popular car brands in Ukraine in 1Q06, accounting for 65% of new car sales over the period.

• Ukraine’s banking sector is among the fastest growing in Europe and is expected to catch up with Poland’s current market level in 5-6 years, implying an up to ten-fold consumer lending increase in the next five years. Ukraine’s mortgage market more than tripled in 2005, to USD 2.1 billion, growing by 140% p.a. in 2002-2005, driven by political stabilization, creation of a proper regulatory base, strong personal income growth (20% CAGR in 2004-05), real estate price growth (30-50% p.a. in 2004-2005), and declining mortgage interest rates (from 15.0% to nearly 12.0% in 2005) on higher competition and lower deposit rates.

• Despite robust lending growth, Khreschatyk (a leading bank in Ukraine) boasts outstanding loan portfolio quality and the sector lowest non-performing loan rate of just 0.3% of the 2005 loan portfolio

• Shostka expects its full-year sales to remain higher y-o-y. The company’s mid-term plans call for increasing semi-hard cheese production capacity by 40% in 2007-2008, introducing new higher margin semi-hard cheeses, and raising the volume and variety of small packs sold, to be supported by a nationwide advertising/brand-building campaign.

• With Ukraine’s total advertising market forecast to grow from just over USD 500 mil. in 2005 to about USD 1.2 billion in 2008, KP Media plans to accelerate its growth by aggressively expanding regionally with existing titles and launching new publications in order to solidify its leading market position. The company also plans to offer new web resources to extend its reach for the Internet audience.

• Sablink is looking to raise USD 48 million to acquire 600 ha of agricultural land within 18 km of the Kyiv city. Upon the purchase and conversion of the land to a residential construction site, the transaction manager will either sell it to property developing companies to exploit “conversion arbitrage” or will hire property developers to build a suburban cottage village and capitalize on growing demand for out-of-city houses.

• Modeled after VK’s existing successful malls, the development company plans to build over 230,000 square meters of modern shopping and entertainment space in eight locations over 2006-2008. VK’s supermarkets and hypermarkets are expected to be the malls’ key anchor tenants, while competing for properties and leasing them at market rates.

• MTI is Ukraine’s leading shoe retailer and exclusive domestic distributor of international brands such as Ecco, Lloyd, Clarks, Bally, Camel Active and many others. The company operated 37 shoe stores and three luxury menswear stores (Ermenegildo Zegna) nationwide as of May 2006.

I suspect that similar comments could be found about many emerging markets. The point is not to downplay the ramifications of the recent collapse in many emerging market stock indices. Rather, it is a reminder that sometimes stock prices do their own thing and that a financial panic doesn't always lead to an economic shock.

Central European Media Enterprises: Shares Under Pressure

Central European Media Enterprises (CETV) shares fell 6% on Monday to close at $58.50. The stock got as low as $55.30, down more than 11%, before recovering. I was nibbling in the morning so I could add to positions in a few new client accounts where I was averaging down. You can take my willingness to buy into such a big down day as a signal that at the corporate level I see nothing that has changed for CETV.

CETV shares closed over $70 on May 10th but have since fallen 18% to Monday's close. I have gotten a number of inquiries about the cause of the decline and I think the answer is entirely tied to the weakness in emerging market stock indices. Central Europe and Russia Fund (CEE), a decent proxy for CETV's geography, has fallen 26% since May 10th. The Prague Stock Exchange in the Czech Republic, where CETV operates its largest station has fallen over 12% since May 10th.

Based on my spreadsheet, which is built off the guidance the company provided on its most recent conference call, CETV shares are trading at under 10 times my expectations for 2007 EBITDA (assuming money losing Croatia is worth $0) and less than 20 times my earnings estimate for 2007. I think this a great bargain given my belief that CETV can sustain at 15% growth rate in its revenue, operating cash flow, and free cash flow over the next several years....

One interpretation of the meltdown in emerging markets is that it is a prelude to sharply slowing GDP growth rates in these countries. I can’t really say if that is the case but in Central and Eastern Europe I am betting against a big slowdown. While energy and industrial commodities have played a role in the GDP growth of many countries in the region, the region's growth has also benefited from good tax and fiscal policy, low cost labor and infrastructure, and capital inflows from high cost Western European companies desperate to compete in the global marketplace. Additionally, so far at least, despite the sharp declines in the region's stock markets, the currencies have held firm.

I think advertising dollars will continue to flow into Central and Eastern European TV markets barring anything short of outright recessions. There are too just many emerging consumers, many in advertiser friendly younger demographics, to ignore.

I accept the sell-off, which I think has been exacerbated by some investors that have used CETV as an emerging market proxy. Maybe growth will slow and multiple contraction is warranted. I remain confident in my $80 plus target on 2007 estimates and I see no reason to lower 2007 estimates based on the sell-off in emerging market stocks. Maybe that will prove to be a naïve position, but it is a risk I am willing to take given CETV's growth potential. Additionally, I see CETV as less risky than a typical emerging market stock because the company reports using US GAAP and is incorporated in the US with executive offices in London.

Follow-Up Comments On Central European Media Enterprises Quarterly Earnings

The company's 2006 guidance is actually quite a bit below my prior expectations due to a complete restructuring at TV Nova in the Czech Republic and higher than expected losses at the start-up in Croatia. These two negative factors are partially mitigated by continued outstanding growth in Romania and Ukraine where results in 1Q and probably for the year will be comfortably ahead of my already above consensus expectations.

At Nova, CETV has put the head of its hugely successful Romanian operations in charge with a plan to duplicate the strategy and reignite growth in the Czech Republic which is the company's largest market. To accomplish this task first requires Nova as the market leader to raise advertising pricing in the market. This is a realistic goal as pricing in unchanged since 1999 despite superior GDP growth. Due to low pricing, TV advertising has just a 47-48% share of total advertising in the Czech Republic, below the 55% level in similar markets. Nova's 2006 results will suffer greatly as the company has instituted aggressive price increases which were intitially rejected by advertisers. The station has now completed negotiations and locked in double digit pricing gains. Revenue at Nova will fall 19% this year according to guidance, although aggressive cost cutting will limit the EBITDA decline to just 10%.

Management provided 2007 and 2008 guidance for Nova which I took as an indication of their extreme confidence in their strategy. For 2007, revenue will rise 40% and EBITDA will rise 50% against depressed 2006 levels. For 2008, management forecast an additional gain of 17% in revenue and 25% in EBITDA. Achieving these targets requires margins to move to industry high levels in excess of 60%. Given that margins were 48% in 2005 before any cost cutting or price increases, this doesn’t seem that much of a reach. Nova will also benefit in 2007 and 2008 when $40 million of advertising on state-owned TV will be phased out. As the industry leader, Nova should pick up an incremental $10 million or so in each year at an unusually high margin. Finally, expect launches of additional channels for cable as was done successfully in Romania. These channels can be launched cheaply and enable selling a demographics based package of ads to marketers. This is routine stuff in most European TV markets and is another indication of the relative backwardness of the Czech TV market despite the seemingly advance state of country compared to other Central and Eastern European countries.....

Essentially, CETV is shifting revenue and EBITDA out of 2006 and into 2007 and 2008 in the Czech Republic. The bottom line is that if guidance is met, Nova will have produced a 15% CAGR in EBITDA off its first year of ownership in 2005. This is actually much higher than analysts had previously expected although it requires a step back before two leaps forward.

Assuming Croatia begins a significant turn toward profits in 2006, Slovakia follows the turn at Nova, and Slovenia, Romania, and Ukraine continue on their growth paths, CETV will produce a 20% 3 year EBITDA CAGR off the excellent 2005 results. This is truly outstanding growth and worth significantly more than 11 EBITDA multiple the shares are currently trading at adjusting for the losses in Croatia.

Univision (UVN), the best growth asset in traditional media in the US, currently trades at 16 times 2006 EBITDA and is hoping to get 18 times in a buyout. Even if UVN weren't for sale, it would probably be trading today at 14 times 2006 estimated EBITDA. CETV has a faster growth rate than UVN but is a smaller company, though not small by any means with a $3 billion enterprise value, and operates in riskier markets. I think CETV can easily trade at 14 times 2007 estimates which would move the stock to the mid $80s. Underlying asset value using the 18 multiple asking price for UVN is over $110. CETV is not for sale but looking out to 2008 this is not an unrealistic target if guidance and growth targets are met.

Click the CETV link below to see all prior posts on CETV in reverse chronological order.

Central European Media Enterprises: Shares Respond Well To First Quarter Earnings

Here are the comments I wrote yesterday as soon as I got off the CETV conference call. I'll post a more complete analysis Monday morning after I finish updating my spreadsheet and checkng withmy contacts:

I just got off the Central European Media (CETV) conference call. The shares are trading up, recouping some of the losses in the last month. The quarter more or less met my expectations, although the contributions on a country basis varied widely from my model. As I adjust my spreadsheet, I find that my 2006 numbers are coming down due to an investment year in the Czech Republic, Slovakia, and Croatia. Next year still looks the same as management guidance for the Czech market was optimistic and very specific. Management even provided detailed guidance for this market in 2008. I am assuming that guidance this far in advance would not have been provided without an unusually high degree of confidence.

Romania and Ukraine remain the growth drivers. After a 2006 setback, the Czech Republic will be a larger growth contributor over the 2007 to 2008 time frame than I previously expected. Trading higher multiyear growth for weaker performance in 2006 is an acceptable strategy, in my opinion, however, requires a greater reliance on 2007 forecasts to provide upside in the stock. Having been with this management team since 2001, I have full confidence that 2006 through 2008 guidance will be met. Therefore, I am willing to look out into 2007, where I think the shares could move well into the $80s.

The few analysts who follow CETV might take a different view as their models require a lot of tinkering. I suspect a couple of analysts may not be willing to model the 2007 guidance and will take a more cautious view. If any such commentary does come from analysts and push the shares lower, I'd increase positions in Northlake accounts. I am a willing buyer at current levels although Northlake's position is presently full.

Central European Media Enterprises: Earnings and Guidance Due Tomorrow

Central European Media Enterprises (CETV) reports before the open tomorrow. The company should also provide full year 2006 guidance and possibly comments on 2007. I am confident in the 2006 and 2007 outlook, however, I think the first quarter holds the potential to disappoint some investors and create skepticism that the full year guidance will be achieved.

The stock has acted poorly over the next month and several analysts have commented on the possibility of weakness in the quarter so maybe the bar has been lowered. I think the numbers and commentary will tell the story and would not take a position, long or short, to play the quarter. I remain long CETV in Northlake client and my personal accounts and expect the shares to be much higher over the balance of 2006 and 2007 unless tomorrow's news is a worst case scenario.

1Q06 faces an issue because of weakness in advertising revenue at TV Nova, the company's station in the Czech Republic, which will produce about 40% of total CETV revenue in 2006. Nova faces a tough comparison against the final quarter of ownership under previous management. The problem is made worse because Nova lost advertising market share in 1Q when it tried to implement aggressive price increases. Despite strong economic growth and good ratings, ad prices in the Czech Republic are unchanged since 1999. Advertisers balked at Nova's asking price of a 20-30% increase and the primary competitor, TV Prima, decided to take the money rather than support the price increase. Analyst estimates range from a decline of 10-20% at Nova in 1Q. Included in the decline is a 4% currency hit, so local currency declines are in the 6-16% range. I think local currency will witness a 10% decline....

Several items mitigate my concern about Nova's weak 1Q performance. First, Nova settled with advertisers on a price increase of about 15% beginning in April. Second, 1Q is seasonally slow and I think it may account for 20% or less of Nova's full year results. Third, at current exchange rates, currency provides a mid-to-upper single digit tailwind the rest of the year. Fourth, ratings at Nova have been stable. Fifth, beginning next year, state-owned TV stations must eliminate advertising. Finally, management has indicated deep cost cutting is underway at Nova which should support margins in 1Q and provide leverage later this year and in 2007.

Despite the weak 1Q, I think Nova can still produce top line growth of 4% this year with stable operating margins. I also expect continued growth of 25-35% in Romania and Ukraine and rebounding performance in Slovenia and Slovakia, so I believe the company will guide to double digit revenue growth with expanding margins in 2006. For 2007, I think the company will forecast similarly considering that Nova could have a full year at the new higher price points.

I think CETV shares can reach the mid to upper $70s this year if the outlook for 2006 and 2007 is consistent with my expectations. Focusing solely on 2007, I think the shares can work well into the $80s.

Recent Weakness at Central European Media Enterprises

Central European Media Enterprises (CETV) shares have pulled back over 10% in the last month after jumping about 20% early in 2006. The decline seems related to news articles in the Czech Republic indicating that advertisers have firmly resisted the company's ad sales strategy that attempted to implement a 30% price increase. CETV management has noted that prices in the Czech Republic are unchanged since 1999 and that prices increases were warranted.

Several news articles have claimed that the price increases failed and that the company's local affiliate, TV Nova, endured a tough first quarter with revenue in local currency declining by 10% or more. Coming on the heels of a secondary offering in the shares priced at $70, these stories have led to selling in the shares. Nova is projected to generate about 40% of total corporate revenues in 2006.

Management was pretty clear on its last conference call that comparisons at Nova would be negative in 1Q06 but also was very confident that they year would end up with solid growth. I had modeled a 4% gain built on negative growth in 1H06 and positive growth in 2H06, especially the seasonally powerful 4Q. Some analysts had assumed higher full year growth, and, in fact, some today still have 10% growth in their models. I think it is fear that full year guidance will far short of these higher estimates that is pressuring the shares. I see these fears as misplaced because even if growth at Nova is low single digits, I think growth in other markets, especially Ukraine, Romania, and Slovenia, will more than make up for it and still allow the company to meet my overall 13% revenue, 20% EBITDA growth estimate.

Despite my confidence, I was pleased that a new article out of the Czech Republic, written by the same journalist who had published the prior negative articles, reveals quotes from management indicating that the company had settled with advertisers for a 15% price increase. So far in 2006, ratings for Nova have rebounded from weaker than usual 4Q05 levels. Additionally, I have been told that inventory in the market is tight as Nova's primary competitor had weak 1Q ratings and is using free or discounted ad time to make up the shortfall. Taken together, these datapoints suggest that Nova should be back on a path to solid growth, possibly as soon as 2Q06.

The company is due to report 1Q06 in early May. At that time, full year 2006 guidance will be provided. If this analysis is correct, investors may find relief in the full year guidance making recent weakness an attractive entry point for CETV shares.

Central European Media Enterprises Announces Equity Offering

Last week, Central European Media Enterprises (CETV) announced an equity offering. The company appears to be raising cash for future investments as the SEC filing document indicates the proceeds of the offering will go in the bank. I doubt it will stay there for long but assuming the interest earned will 4%, I see the deal as about 5 cents additive to EPS and 10 cents additive to free cash flow per share assuming the money stays in the bank. CETV should earn around $2.25 in 2005 and almost $3.00 in 2007.

I exchanged several emails with the CFO about the ultimate use of the money. He indicated that there are several small projects on the horizon in the internet and TV production/distribution areas that could consume some cash. Additionally, the company wants to build some reserves to increase its stake in its operating companies if the opportunity arises. As a reminder, CETV has spent about $50 million already this year to increase its stakes in Romania and Slovakia. Importantly, in Slovakia, CETV was able to obtain control of its broadcasting license....

I strongly suspect that this cash is being raised in order to fund an increase in CETV's economic ownership in Ukraine which will also allow the company to gain control of its broadcasting license. Presently, CETV owns a 60% economic interest in its operations in Ukraine and only has a minority stake in the company that controls the license. Recently, the Ukrainian Parliament passed a law allowing foreign ownership of broadcast licenses and the President is expected to sign the bill this month. On the latest conference call and in other recent management presentations, CETV has hinted that they have a deal to increase ownership in Ukraine. I believe the market would view this very positively because absolute control lowers the risk profile and because Ukraine is one of the company's fastest growing and largest long-term opportunities.

CETV shares initially fell about $1 following announcement of the deal but have since recovered and touched a new 52 week high today. The company will sell 2.53 million shares if the green shoe is exercised raising $166 million. The deal represents almost three weeks of average daily volume so temporarily I think the stock will be capped as the supply-demand balance is upset. However, given my strong confidence in the company's 2006 and 2007 outlook coming off the excellent 4Q05 results and extremely constructive commentary on the latest conference call, I think the shares will resume their upward trend once the deal gets done. I've paid as high as $65 for the shares and would use any additional deal related weakness to add further. I stand by my outlook for a mid $70s target based on 2006 estimates and an upper $80s target on 2007. Assuming I am right about gaining further ownership in Ukraine, I'd view those targets as at least $5 too low.

Central European Media Enterprises: Final Thoughts on 4Q05

As a follow-up to my earnings coverage of Central European Media Enterprises (CETV), I wanted to mention that my spreadsheet now assumes 20% segment level EBITDA growth for 2006 to $237 million. EPS, using a very non-GAAP formula comes out at $2.20. For 2007, I think 15% EBITDA growth is easily achievable, with EPS potentially exceeding $3.00.

A key takeaway from the earnings call is increased confidence in the growth outlook for 2006 and 2007. Although formal 2006 guidance won’t be given until the 1Q06 earnings call in early May, management was specific and confident in its discussions of revenue, expense, and margin drivers. Consequently, I have firmed up my 2006 target, and, although it is early, I am willing got take a peak into 2007 for valuation purposes.

For 2006, I think that the EBITDA multiple will expand due to the high visibility of growth for all the factors within management's control. I think the stock can touch a 15 multiple which would put the target in the mid-$70s if credit is given to free cash flow and money-losing Croatia is valued at $0.

Looking into 2007, my target reaches the upper $80s assuming (1) the multiple holds, (2) EBITDA grows another 15%, (3) two years of free cash flow totaling at least $150 million is credited to the shares, and (4) Croatia remains valued at $0 despite reaching breakeven. By the way, I think Croatia is worth a lot more than $0 given that 2006 revenue could reach $25 million.

I have a full position in CETV but will look to add if it pulls back a bit. I am still a buyer for new clients. There is plenty of upside left despite the huge run since 2001.

Central European Media Enterprises: Great Quarter and Increased Confidence in Growth Outlook

Central European Media Enterprises (CETV) reported better than expected operating results for 4Q05. Segment revenue of $173 million slightly exceeded management guidance of $171 million. Analyst estimates were generally in line with guidance. EBITDA of $70 million easily exceeded guidance of $58 million. Analyst estimates for EBITDA were slightly above guidance but still under $60 million. The quarter and extremely positive tone on the conference call reinforce my belief that the shares are headed into the $70s. I am more confident in the CETV story now than I was prior to the earnings release and conference call. I am considering adding to CETV positions, particularly if any pullback toward the $60 level occurs.

For detailed analysis of the earnings and conference call, please follow the "Continue Reading" link below...

4Q05 Earnings and Conference Call

On the revenue line the original four stations in Romania, Slovenia, Slovakia, and Ukraine exceeded analyst estimates. In Romania and Ukraine, total TV ad market growth remains remarkably strong at 25-35% year-over-year. Analysts and management continue to be cautious with the forecast to be prudent but a slowdown does not appear to be coming anytime soon. In fact, management concluded the call by affirming that growth in these markets in 2006 should remain in the 25-35% range.

Slovenia outperformed expectations for revenue in 4Q05 due to very successful programming that drove ratings, ad revenue, and even online revenue related to subscriptions for webcams related to reality programming. As an aside, across Central and Eastern Europe, reality programming remains incredibly popular. Slovakia did see a revenue decline in 4Q05, as expected, but the 9% drop was not as severe as the 12-15% drop analysts were expecting.

While revenue exceeded estimates in the original four countries, the Czech Republic (CR) and Croatia fell short of estimates. CR produced $65 million in revenue, about $5 million less than expected. As noted below this did not matter on the EBITDA line. Slower than expected local currency growth, a brief ratings stumble, and continued discounting of ad inventory by CETV competitors led to the shortfall. In Croatia, lots was accomplished at the start-up with significant double digit ratings gains but fall programming lunched later than expected leading to a year-over-year revenue decline.

The big positive surprise in 4Q05 was on the segment EBITDA line, which exceed guidance and analyst estimates by $10 to $12 million, or 16-20%. Based on guidance, the variance of $12 million was composed of an $11 million cost-driven surprise in the Czech Republic, $5-7 million in the original four markets, and a $3 million larger than expected at the Croatia start-up. The press release mention the opportunity the company had for significant operating leverage in the years ahead. The positive surprise in 4Q05 was an indication of the leverage.

Management did not provide full year 2006 guidance on the call as expected. I was mistaken in expecting it as the company has previously provided full year guidance on its 1Q call in early May. Nevertheless, management was extremely confident and optimistic aobut the outlook for 2006 throughout the call. My expectations for low double digit growth in revenues and expanding margins looks to be in the bag for 2006. As usual with CETV, timing issues on a country-by-country basis will create volatility in the quarterly numbers but 2006 is shaping up to be another great year for CETV.

I mentioned above that management stated that Ukraine and Romania should grow 25-35% again in 2006. Those gains would be above my prior, purposefully cautious assumptions. In the CR, management noted the full year results will be solid but that 1Q06 revneu comparisons would be negative. I am not concerned as 2Q and especially 4Q results in local currency will turn the full year around. Additionally, management repeatedly noted significant cost saving opportunities that would lead to to a year-over-year decline in costs in 2006. In fact, management noted more than once that prospects in the CR were "substantially greater" than they though when they completed the acquisition in May 2005. The potential for several years of double digit revenue and EBITDA growth off the 2005 base was confidently stated. Management comments on the other markets for 2006 were equally constructive.

I fully expect management to offer 2006 guidance at least equal to my forecast on the May conference call. I think my assumptions will ultimately prove low but I doubt management will be that aggressive with the initial guidance. Management did promise to provide a look into as well. I can’t imagine why they would do that if the news wasn't going to be good. It is possible that 2007 will offer more growth than 2006 and management wants to put that out there in case certain countries in 2006 aren’t as strong I hoped. I doubt that is the case but I am trying to remain skeptical and wary.

CETV remains a true growth stock. The markets the company serves are growing rapidly. Ongoing results indicate the executive and operating management teams are superior. Acquisition opportunities remain but are unpredictable. CETV shares trade at a well deserved premium to US media stocks but I think upside remains in the valuation and the estimates. More importantly, the long-term growth opportunity is secure. I think the shares will head into the $70s in 2006, possibly higher.

Central European Media Enterprises Earnings Preview

Central European Media Enterprises (CETV) reports before the open on Thursday. I remain optimistic about the shares with the caveat that quarterly are quite volatile particularly on a country-by-country basis. If my forecast for 13% revenue growth and over 18% EBITDA growth in 2006 receives support from management, I think my target in the low $70s is very realistic. If there is significant variance to the downside from my forecast, the shares could take a tough hit but that would not likely change my long-term view that CETV offers superior long-term growth.

CETV has minimal analyst coverage so I construct my own consensus using five analysts. Analysts and investors in CETV analyze the company at the segment level focusing on country-by-country revenue and EBITDA. For 2005, the company has provided full year guidance by country but nothing specific for the fourth quarter. However, with three quarters in the books, it is possible to work backwards to see what the assumptions for 4Q05 must be. This is not possible for the Czech Republic where there is no comparable 4Q04 number available. The company completed its acquisition in the country in May has not provided pro forma quarterly historical results. With those caveats, here is my preview:

Excluding the Czech Republic and comparing just the full year guidance to the YTD results, 4Q05 revenue growth is projected at 14%. This figure covers Romania, Slovakia, Slovenia, Ukraine, and the money-losing start-up in Croatia. For 4Q, Ukraine should show the highest revenue growth at around 40%. The much smaller operation in Croatia should see revenue growth in the mid-30% range. Romania should show growth of 18% and Slovenia should come in around 7%. As forecast by the company, Slovakia will be down double digits on the revenue line due to some programming issues.

In the Czech Republic, the company will probably show pro forma revenue growth in the low single digits. The overall market grew in the low double digits in local currency but the company faces a modest currency drag due to strength in the dollar and ratings have shown some weakness, which is now apparently resolved.

If I were to make an informed guess, I'd say that results in Romania are likely to surprise to the upside. YTD revenue growth has been 37% and every quarter for the last three years has shown growth of at least 30%. Some slowdown is inevitable as the market matures but I don’t see 4Q05 growth dropping all the way to 18% unless a specific previously undisclosed timing issue exists. I don’t see as much room for surprise in the other five countries although if I had to guess I'd say the Czech Republic could go either way as measuring local market strength vs. ratings vs. currency leaves a lot of wiggle room.

EBITDA growth, excluding the Czech Republic, should be around 14%. Further excluding the losses in the Croatia, EBITDA growth should come in around 18%. All of the growth will be driven by margin expansion in Romania and Ukraine, both of which could see EBITDA gains north of 40% in 4Q05. The revenue decline in Slovakia will lead to a sharp EBITDA decline due to operating leverage inherent in the TV broadcasting business. Similarly, the slow revenue growth in Slovenia should lead to a year-over-year decline in EBITDA.

In the Czech Republic, management has acknowledged that 2005 was a year of investment while facing tough comps, so modestly negative EBITDA growth on a pro forma basis in 4Q05 would not be surprising. Nevertheless, I suspect that EBITDA growth will eke out a gain in the quarter.

While quarterly results for CETV have proven quite volatile on a country-by-country basis in the past, annual growth has been strong and predictable. I expect management to provide full year 2006 guidance on the call. My own spreadsheet calls for revenue growth of 13% across all six countries pro forma for a full year of ownership in the Czech Republic in 2005. My expectation for growth by country is as follows: Romania, 22%: Slovakia, 10%: Slovenia, 8%, Ukraine, 28%, Croatia, 10%, and the Czech Republic, 6%. Excluding the newly acquired operations in Croatia and the Czech Republic, I project revenue growth at 18% in 2006.

On an EBITDA basis, I project 2006 growth across all six countries at 18%. I think margins can expand in every country except the Czech Republic, and losses in Croatia should lessen. Rebounding margins in Slovenia and Slovakia seem likely due to unusual depressants in 2005. Ukraine could see significant margin expansion due to the very high revenue growth rate and the beginning of maturity in the business operation.

I think there is upside in Ukraine and Slovakia in 2006. Ukraine is at a point in its life cycle where Romania accelerated. Barring disruption on the political front, which is possible with a national election coming in March, I think EBITDA growth of well over 30% is possible. Slovakia could benefit from synergies with the much larger operations in the Czech Republic.

I am uncertain about the outlook for 2006 in the Czech Republic. In my opinion, this is the big wildcard for the stock. Presently, I am assuming 6% revenue growth and flat margins. Honestly, as far as I can tell, the 2005 results in the Czech Republic were disappointing. I think the company would agree but would argue that it was a year of investment spending and the comp was tough due to the prior owner maxing out results ahead of the sale. 2006 also faces a tough currency comp during part of the year. I'd like to see the company harvest in 2006 and allow EBITDA margins to expand. If that is the forecast, it will be good news for the shares as the Czech Republic will account for 40% of revenue this year.

Central European Media Enterprises Increases Stake in Romania at Attractive Price

One week ahead of its March 2nd 4Q05 earnings report, Central European Media Enterprises (CETV) announced an increase in its ownership of its operations in Romania. In a negotiated agreement with its partner, CETV is paying $27.2 million for an additional 5% stake in Pro TV. CETV will now own 90% of Pro TV. The remaining 10% ownership is subject to a previously negotiated put option whereby the Romanian partner can put at in 1% increments with price subject to an independent appraisal and a minimum floor of $1.45 million for each per cent of ownership.

CETV has been steadily increasing its ownership in all of its operations. I think this is an excellent expenditure of corporate resources as the prices have been good and increased ownership mitigates the risks of operating in emerging markets. CETV now controls a majority stake in all of its operating and license companies....

The latest deal in Romania implies a valuation for the entire Romanian operation of $544 million. I am expecting Romania to report EBITDA of $44 million in 2005 and $58 million in 2006. The multiples work out to 12.3 times and 9.4 times, respectively. Both are attractive prices relative to CETV's current trading multiples of 16 and 13 times 2005 and 2006 estimates. The price is also attractive given Romania's 84% CAGR for EBITDA since 2003 and expectations of continued growth in excess of 20% annually. I suspect the Romanian partner thinks a higher price is warranted but as a minority shareholder with no one else to sell to a discount price was the only option.

CETV reports before the open this coming Thursday. I'll have more comments closer to the report but I expect a strong quarter in the favorable seasonal period. The company has provided full year guidance only for 2005 but working backwards from the nine-month numbers allows some insights. I think the implied figures look conservative with the possibility of upside surprise based on strength in Romania and Ukraine. TV Nova in the Czech Republic accounts for about half of the company and represents the greatest risk. Ratings have been mixed but indications are that the total advertising market grew strongly in 4Q05. There is also some slight risk in currency translation in 4Q.

The company will likely provide full year guidance for 2006 for the entire company and general trends in each country when it reports. I currently expect 15% revenue growth and 20% EBITDA growth. Currency risk is more significant in the first half of 2006, especially in the Czech Republic. The company does go to great lengths to discuss and analyze its operations in local currencies. I think the key to the 2006 guidance will be TV Nova with the swing factor being how much investment is made in the Czech Republic vs. a strategy of harvesting growth for a year or two.

I remain optimistic on CETV shares with a target in the low $70s based on my outlook for 2006. I lightened up on my position a couple of months just under $60 as a portfolio management discipline exercise but still own a full position throughout my client and personal portfolios.

Central European Media Enterprises Increases Stake in Romania

One week ahead of its March 2nd 4Q05 earnings report, Central European Media Enterprises (CETV) announced an increase in its ownership of its operations in Romania. In a negotiated agreement with its partner, CETV is paying $27.2 million for an additional 5% stake in Pro TV. CETV will now own 90% of Pro TV. The remaining 10% ownership is subject to a previously negotiated put option whereby the Romanian partner can put at in 1% increments with price subject to an independent appraisal and a minimum floor of $1.45 million for each per cent of ownership.

CETV has been steadily increasing its ownership in all of its operations. I think this is an excellent expenditure of corporate resources as the prices have been good and increased ownership mitigates the risks of operating in emerging markets. CETV now controls a majority stake in all of its operating and license companies....

The latest deal in Romania implies a valuation for the entire Romanian operation of $544 million. I am expecting Romania to report EBITDA of $44 million in 2005 and $58 million in 2006. The multiples work out to 12.3 times and 9.4 times, respectively. Both are attractive prices relative to CETV's current trading multiples of 16 and 13 times 2005 and 2006 estimates. The price is also attractive given Romania's 84% CAGR for EBITDA since 2003 and expectations of continued growth in excess of 20% annually. I suspect the Romanian partner thinks a higher price is warranted but as a minority shareholder with no one else to sell to a discount price was the only option.

CETV reports before the open next week. I'll have more comments closer to the report but I expect a strong quarter in the favorable seasonal period. The company has provided full year guidance only for 2005 but working backwards from the nine-month numbers allows some insights. I think the implied figures look conservative with the possibility of upside surprise based on strength in Romania and Ukraine. TV Nova in the Czech Republic accounts for about half of the company and represents the greatest risk. Ratings have been mixed but indications are that the total advertising market grew strongly in 4Q05. There is also some slight risk in currency translation in 4Q.

The company will likely provide full year guidance for 2006 for the entire company and general trends in each country when it reports. I currently expect 15% revenue growth and 20% EBITDA growth. Currency risk is more significant in the first half of 2006, especially in the Czech Republic. The company does go to great lengths to discuss and analyze its operations in local currencies. I think the key to the 2006 guidance will be TV Nova with the swing factor being how much investment is made in the Czech Republic vs. a strategy of harvesting growth for a year or two.

I remain optimistic on CETV shares with a target in the low $70s based on my outlook for 2006. I lightened up on my position a couple of months just under $60 as a portfolio management discipline exercise but still own a full position throughout my client and personal portfolios.

The Univision Buyout and Central European Media Enterprises

Based on news reports, it appears that Univision (UVN) wants to sell itself for $13 billion. Along with about $1.5 billion in debt that would work out to 18 times projected 2006 EBITDA of $800 million. It is a rich price, especially given that major media companies generally trade at 8-10 times EBITDA. UVN is a high growth asset that can’t be duplicated so a big premium is in order. I am certain there will be plenty of companies and private equity shops that will take a close look. By the way, those same things apply to Central European Media Enterprises (CETV). See the end of tis article for details

So far, speculation about buyers for UVN has centered on the usual suspects: Viacom, News Corporation, Time Warner, Disney, and CBS. Grupo Televisa, which owns 9% of UVN already and is its primary programming supplier under a long-term agreement thru 2017, has also received prominent mention. Private equity is clearly a potential buyer on its own or in partnership with a media company, although a high growth, high multiple asset doesn’t fit the private equity deal profile....

Although it hasn’t stopped UVN from ramping, all of the buyers mentioned face significant obstacles. CBS and News Corporation will be restricted by the federal cap on TV ownership. Disney doesn’t own enough TV stations now to bump up against the cap but the company is already in the process of completing the $7 billion Pixar deal and just divested its radio distribution assets. Time Warner seems like a logical buyer to me as it owns no TV stations and owns only the soon-to-be merged WB Network within the broadcast TV realm. Of course, the controversy surrounding TWX probably means a UVN acquisition would have to be part of a larger corporate restructuring. Viacom could make a run and views itself as a growth company but I think Sumner Redstone would have to resign his CEO role at CBS and maybe even give up his equity stake. Additionally, Viacom just slimmed down by exiting broadcast TV so a big deal right out of the chute at a 50% plus premium to its own shares seems unlikely. Televisa is probably the most logical buyer but a foreign entity can’t control the TV licenses so they would need a local partner or their controlling shareholder would have to become a U.S. citizen. As for private equity, they seem to have unlimited access to cash but as mentioned above they are value buyers not growth buyers.

Despite all those obstacles, a deal seems likely to get done. As David Faber noted on CNBC this morning, investments bankers can become awfully creative when a big deal is on the line. The second day of gains on UVN shares on Thursday in light of news reports about the obstacles bidders suggests the market is not concerned a deal won’t get done. By the way, Faber knows his stuff on media and seems to have good contacts.

I'd like to toss out another couple of ideas for buyers: Gannett and Tribune. Gannett already is successfully involved in TV and has a great reputation as an acquirer. In the past, Gannett owned cable so a history as a more diversified company exists. The company could clearly use the growth boost given concerns over its stagnating newspaper business. UVN would bring heavy dilution though as GCI trades at only 8 times EBITDA itself.

A very similar argument could be made about TRB. In fact, TRB has a much bigger stake in TV and has a lot of experience running Spanish language newspapers in larger cities. On the other hand, TRB shares are really depressed and the company's financials results have been much worse than their peers. This is not exactly the environment from which management has strength to make a major dilutive acquisition.

I've never owned UVN don’t plan to buy it in here. I don't play takeovers after they are announced and the multiple is not my style. Also, I think I own a growth company in media with a lot more upside: Central European Media Enterprises. I've always compared CETV to UVN from a valuation perspective and have always preferred to own CETV shares rather than pay a premium for UVN.

CETV offers higher growth than UVN, with 20% growth in EBITDA sustainable for several more years. CETV is also less impacted by cyclical forces that impact advertising in industrialized markets. CETV is a lot smaller with a market cap of just $2.2 billion and pro forma revenues of $540 million, leaving it more room to grow. Granted, CETV operates in emerging markets which adds a significant element of risk.

CETV trades at 13 times my estimate of 2006 EBITDA, a sharp discount to UVN's likely takeout multiple. Ronald Lauder controls CETV and is not a seller but there would be no shortage of bidders if the company were for sale. Each point of multiple expansion for CETV adds over $5 to the stock price. I think the company's growth profile comfortably justifies the current multiple so it is easy to see why I continue to prefer it to UVN.

Central European Media Enterprises Takes Full Control in Slovakia

There was good news out of Central European Media Enterprises (CETV) on Monday as the company announced that it had completed its acquisition of a controlling interest in the license company for its station in Slovakia. Obtaining the interest will allow Slovakia to be consolidated which will greatly simplify the income statement and provide increased transparency to the company's financial results. The transaction also brings another 10% in economic interest which means CETV now controls 80% of the economics. Local partners continue to own 20% of the operating company and 11% of the license company....

Beyond gaining control of the license company, which is always a concern in emerging markets, the acquisition allows CETV to take greater operating control at the management level. This could prove especially valuable as there is a lot of potential synergy with the company's flagship station, TV Nova in the Czech Republic. Each stations signal bleeds across the border and language is shared. The ability to cross sell, cross promote, and share programming expense is all positive.

CETV is paying $29.5 million for control of the license company and the 10% additional economic interest. It is hard to judge how much of the price should be accrued to the license vs. the economic interest. However, the deal potentially values Slovakia at as much as $300 million and it is probably safe to assume at least $250 million. In 2005, Slovakia will report a little over $16 million in operating cash flow, down about 13% from 2004. The company made some poor programming decisions which hurt ratings. I am not overly troubled by the 2005 shortfall, as the CAGR in operating cash flow off the 2002 base is 23%. Additionally, with firmer ratings, improved cost controls, and the Nova synergies, I think Slovakia can rebound to 15%or higher growth in 2006.

CETV presently trades for 13 times 2006 estimated attributable station level operating cash flow. Enterprise value is $2.7 billion. Slovakia has just been validated as worth at least 10% of the entire company despite providing just 8-9% of total cash flow. Growth in 2006 on a same station basis should be close to 15% driven by Ukraine, Romania, and a rebound in the Czech Republic. I think the big risk is that 2006 turns out to be another year of investment in the Czech Republic which was over half of cash flow in 2005. Political turmoil in Ukraine and another larger acquisition are also risks. I remain confident in the story and think the shares could trade into the $70s if 2006 unfolds as another good growth year. CETV is unlikely to report 4Q05 and provide a 2006 outlook prior to late February, maybe inot early March.

Lehman Launches Coverage of Central European Media Enterprises

A London-based analyst from Lehman Brothers launched coverage on CETV yesterday. I have uploaded a copy of his report. If you want to read it, go to the "Continue Reading" section and click the link. It is a pdf file and requires Adobe Acrobat to access. I plan to upload more brokerage reports in 2006 as an enhancement to the website. They will always be behind the password protection, however.

The new CETV report is a good summary and easy to read. The analyst definitely likes the company and its growth prospects but is neutral on the stock as he has a $60 target. As you know, we trimmed the position at $59 about a month ago, just short of my longstanding $62 target. The analyst notes that if he gains confidence in the organic growth outlook he would likely upgrade his target and recommendation. I think he will gain that confidence when the company reports its 2005 results in late January or early February.

Download Lehman Report on CETV

Czeching in on Central European Media Enterprises

received an email just before Christmas with an update on TV advertising in the Czech Republic. According to TNS A-Connect, during November advertising was up 17% on a year-over-year basis. I view the Czech Republic as one of the more mature TV advertising markets in Central and Eastern Europe, so this is a good sign that the seasonally strong fourth quarter looks good throughout the region.....

The article also noted the largest advertisers during the month were Procter and Gamble (PG), drinks maker Walmark, Nestle (NSRGY), Danone (DA), and T-Mobile. Advertisers with the largest increase in spending over the prior year were insurer Uniqa, Ford (F), Novartis (NVS), and Masterfood. Among advertisers with reduced spending in November 2005 were Coca-Cola (KO), insurer Ceska Pojistovna, Electrolux, and Czech GE Money Bank. What I find notable about the list is the diversity of advertisers by nationality and product or service. I also find it interesting that food, financial services, mobile phones dominate the list. These are exactly the industries you would expect would want to gain a foothold in an emerging consumer economy. Finally, check out the number of quality advertisers mentioned. If you had any doubt about the potential of ad-supported media in emerging markets, the presence of these global behemoths ought to make you think twice.

Ad-supported media stocks in the U.S. face a lot of challenges as traditional media usage fragments and advertising share is lost to new media. In emerging markets, ad-supported media is still a growth media, more akin to Hispanic media in the United States. To play this trend, Central European Media Enterprises (CETV) remains my core holding (Czech Republic is a little under half of 2006 estimates). Programming expenses and ratings matter to CETV as well but the tailwind of double digit TV advertising growth throughout Central Europe provides a nice margin of safety for hitting the numbers.

Trimming Central European Media Enterprises

I was so busy last week at the UBS Media Conference that I failed to get up a post informing clients that I trimmed positions in Central European Media Enterprises (CETV). I've had a long-standing target of low $60s based on 2006 estimates so when the stock first broke through $59 last week, I cut back the position from what was usually the largest individual stock holding in any client portfolio to what I consider a normal-sized holding of 3%. This trimming is consistent with my standard practice of cutting back winning positions as they near long established target prices.

I still think CETV can trade into the $70s if 2006 breaks for the company as I expect it will. Thus, CETV was only trimmed rather than sold completely. Merely rolling forward the current multiple on 2005 estimates to 2006 would get the stock to the $70s.....

The shares now trade for just under 13 times 2006 attributable segment EBITDA adjusting for the losses at the start-up in Croatia. I am zeroing out Croatia for valuation purposes as despite the losses there is value in the license and growing revenue stream. I am looking for 20% EBTIDA growth in 2006 on an apples-to-apples comparison. My key assumptions are: (1) growth of 11% in the Czech Republic following a flat 2005, (2) growth of over 40% in Ukraine on margin expansion and another year of expanding margins, and (3) continued strong growth in the booming Romanian market,, although growth will be closer to 30% rather than the 80% growth in 2005. In general, I see Ukraine as a year or two behind Romania.

Risks to my outlook include the possibility that 2006 turns out to be another year of investment in the Czech Republic, a disruption in Ukraine due to upcoming elections, a larger acquisition that is priced at a premium and/or requires additional equity financing, and a stronger dollar relative to the Euro and other Central and Eastern European currencies.

One of the reasons I am bullish on the stock is the ongoing development of the still immature TV advertising markets in Central Europe. Not only do these markets have much lower per capita ad spend than in Western Europe and consumers that are trading up (from poor to middle class) but integration with European Union media regulation also offers benefits as state-owned TV stations lose share of advertising dollars.

One example of regulation working in favor of TV broadcasters in Europe was revealed yesterday when the EU announced proposed changes to its TV advertising laws that will allow product placement in TV shows and loosen restrictions concerning the timing of commercial breaks. Of CETV's markets, the Czech Republic, Slovenia, and Slovakia are already in the EU, while Romania is scheduled to join in 2007. Croatia has an application pending and Ukraine hopes to join and has received overtures but timing is likely toward the end of this decade.

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.

Central European Media Enterprises: News From Prague Meeting Is Good

The news from Prague about last week's analyst meeting for Central European Media Enterprises (CETV) sounds good. Nothing earth-shattering but a good turnout, solid presentations by local operating management, and a reiteration of guidance with increased detail on a country-by-country basis all bode well for the shares. I still think the seasonally strong 4Q will reinforce the long-term growth story and set up a transition in focus to another year of 20% growth in 2006. If that occurs, I think the shares can move up toward my target of low $60s over the next three or four months....

Regarding the meeting, the key takeaway came from the country-by-country guidance. Beginning with Romania, although I still think the guidance is too low, it implies that EBITDA will grow over 50% in the fourth quarter driven by revenue growth near 20% and continued margin expansion. For all of 2005, Romania is set to show revenue growth of 30% with margins expanding 900 basis points to over 40%.

In Ukraine, the story is similar. Guidance implies 4Q revenue and EBITDA growth of 42% and 95%, respectively. The EBITDA growth is partially a function of a shift in programming from 1Q and 2Q to 4Q which hampered comparisons earlier in the year. For all of 2005, Ukraine should show revenue growth of 32% and EBITDA growth of 43% as margins expand 250 basis points to 30%.

What I find especially interesting about Ukraine is the potential parallel of its 2006 performance to Romania's performance in 2005. Romania grew from $76 million on the top line in 2004 to over $100 million in 2005. Ukraine will end up with around $70 million in 2005 revenue and based on management comments there is no reason to expect a slowdown in the growth of the market in 2006. Consequently, Ukraine will grow to over $90 million in 2006 revenue. Romania had 900 basis points of margin expansion in 2005, which makes me wonder what Ukraine might do in 2006 given the similarities. Right now, I am assuming that Ukraine grows margins 500 basis points next year on a 28% top line gain. That translates to an incremental $10 million in EBITDA, which provides almost one-third of the total corporate growth. Keep in mind that Ukraine has a population of 47 million vs. 22 million in Romania.

News from the other countries was mixed as expected. Slovenia is having a tough year due to a fairly mature market and the impact of a new tax regime that has bumped up employee costs and pressured margins. No repeat of the cost pressures is expected in 2006. Slovakia saw its guidance come down due some poor programming decisions. CETV will have full control of Slovakia in 2006 and a strong rebound should begin which will be enhanced by synergies with the Czech Republic. Czech is looking at a flat year in 2005 as numbers were pumped up by prior ownership in 2004 ahead of the sale of the station. I'd like more clarity on 2006 trends in Czech but currently believe the ad market looks strong enough to support single digit revenue growth with modest margin expansion. Finally, Croatia remains in start-up mode in 2005 and 2006. Losses should moderate in 2006 by several million and during the meeting management discussed reaching breakeven in 2007. If so, that is a meaningful $13 million swing from 2005 to 2007 against a pro forma EBITDA figure of $185 million in 2005.

If you want to understand where the growth is coming from for CETV, check out the slide below that I lifted from the presentation last week that is now on the company's website at www.cetv-net.com:

Download file
">Download Slide

This chart shows that TV advertising spending per capita in CETV's markets is just half of the Eastern European average which itself is just one-third the average of Western Europe. I think the emergence of consumer economies in Central and Eastern Europe is inevitable given low-cost labor, proximity to Western Europe, integration with Western Europe including large capital inflows, and favorable tax laws. Emerging consumer economies can most easily be reached via TV advertising. Remember though that these are still emerging markets so expect volatility, particularly quarter-to-quarter.

Given the dearth of growth in traditional media assets on a global basis, I see CETV as one of the only growth stocks in media. At 11 times 2006 EBITDA and 23 times 2006 EPS, I find the shares very attractive.

Central European Media Enterprises: Good Third Quarter Sets Up Strong Finish to 2005

Central European Media Enterprises (CETV) reported solid 3Q05 EPS last week in a seasonally weak quarter. The market liked the results and the stock is set up well heading into what should be a well-attended analyst meeting in Prague scheduled for Thursday and Friday (my best contact on CETV will be in attendance). I think CETV shares can head toward their all-time highs between now and year end as investors anticipate strong 4Q05 results and look ahead to double digit growth in revenues and operating cash flow in 2006...

CETV has not released quarterly results from 2005 for newly acquired TV Nova in the Czech Republic. Consequently, year over year corporate comparisons are meaningless. However, drilling down to the individual country level showed much better than expected 3Q results in Romania and Ukraine. This is especially good news for CETV shareholders as these are the company's most important growth markets. On a pro forma basis, Nova will be over half of EBITDA in 2005 so investors should also be pleased that guidance for the partial year of ownership was maintained.

In Romania, revenues rose 31% while EBITDA grew an astounding 77%. Romania looks set to produce EBITDA of 2005 in the mid $40 million range, approaching 25% of total country level EBITDA. The growing importance of Romania should really help in 2006 as growth of just 20% would contribute almost 500 basis points to the corporate growth rate all by itself.

Ukraine also surprised in 3Q05 with revenues rising 33% and EBITDA shifting from a small loss a year ago to a $2.4 million profit. Early in 2005, there was concern as tough comparisons in Ukraine made it look as though growth was faltering. More recently, there have been some concerns about Ukraine GDP growth and political stability. Management confidently predicted Ukraine's TV ad market would grow 25-30% this year and next. With an easy comp in 4Q, Ukraine could produce EBITDA 80-90% above year ago levels.

One issue coming out of the quarter was lowered revenue guidance of $5 million due to a shortfall in Slovakia. Management admitted to a reality programming flop. EBTIDA expectations for the whole company were not impacted due to the strength in Ukraine and Romania and Slovakia's relatively small size. The earlier announcement that CETV has obtained full control of Slovakia's operating and license companies sets Slovakia up for a much better results in 2006 and 2007. Slovakia margins trail the group by over 500 basis points and with the benefits of full control and the ability to realize synergies with the much larger Czech market, meaningful revenue and EBITDA growth should occur over the next two years.

Another possible issue is that Nova looks likely to produce a flat year in 2005. I think that the company's 2004 results were probably pumped up by the prior ownership as they positioned the company to be sold. CETV management seems to have their arms around it now and is confident that local currency growth will accelerate in 2006 and especially 2007 and 2008 as advertising on the state-owned TV stations is phased out. 1H06 comparisons could be tough though.

Investors should also be aware that CETV has foreign currency exposure and with the Euro and other European currencies recently weakening, translation impacts on the income statement will turn negative in 4Q05 if current exchange rates hold.

Eliminating Croatia's losses, which for valuation purposes moves this asset to zero, CETV is trading at 13.5 times 2005 and 11.4 times 2006 estimated attributable segment level EBITDA. With pro forma 2006 growth near 20% in 2006, I find this a very reasonable valuation. Further, I am giving no credit for what should be $60-70 million in free cash flow in 2006, or over $1.50 per share.

If the shares hold a 13.5 multiple on 2006 estimates, a near-term price target of $62 is achievable. I think EPS could approach $2.25 in 2006 so a $62 target works out to about 28 times earnings, which I also view as reasonable for one of the only growth stocks in organic growth stocks in all of media.

Central European Media Enterprises: Takes Control of License in Slovakia

Central European Media Enterprises (CETV) broke a long string of losing days yesterday, rising 4%, or $1.77, to $46.49. The company reports earnings before the open on Wednesday but the trigger for Monday's advance was more likely the announcement that the company has increased its stake in its Slovakian operation and gained control of the broadcasting license.

For $28.7 million, CETV has raised its economic stake in TV Markiza in Slovakia from 70% to 80%. More importantly, CETV's stake in the company that owns the broadcasting license goes from 34% to 80%. I am expecting Markiza to produce about $24 million in EBITDA next year, up 12% from 2005....

In theory, buying 10% for $28.7 million values Markiza at $287 million, or 12 times next year's EBITDA. CETV closed at 11 times 2006 EBITDA on Monday so the deal is neutral to very modestly dilutive to valuation. However, one of the big risks to operating in emerging markets relates to license control. Over the years, CETV investors have always asked management about license control issues and rewarded the company when majority control of licenses was obtained. I don�t know how much of the $28.7 million to ascribe to the license control but it is clearly worth something and the market voted with its dollars by crediting the company much more than acquiring an additional 10% economic stake would warrant. CETV now has a 100% economic interest its operations in the Czech Republic, Croatia, and Slovenia. Romania is an 85% economic interest, Ukraine is at 60%, and Slovakia is at 80%.

One other benefit to Monday's deal is that Slovakia will now be consolidated into CETV's financials. This will increase the transparency of the numbers and make the financial statements a lot easier to analyze. Again, I'd ascribe some value to this fact but how much is impossible to measure.

CETV now controls the licenses in every country it operates in except Ukraine. On the last few conference calls, management has mentioned that it is working with its local partners and the government to acquire control. By all indications, the Yushenko government has no objections to foreign control of Ukrainian assets as most recently witnessed by the sale of the largest steel company in the country to Mittal Steel, which is controlled by Britain's richest man.

Third Quarter Preview

As far as the third quarter goes, segment revenue is projected to come in at $95 million with EBITDA at $10 million. The third quarter is seasonally quite small. For example, that $10 million EBITDA figure compares to full year pro forma expected EBITDA of $190 million. Consequently, small variations in revenues or expenses can cause a surprise relative to expectations rather easily. This has occurred in the past in both directions.

The real story coming out of the third quarter will be 4Q05 guidance. I think that the news could be good as I believe that expectations in Ukraine, Romania, and possibly Slovakia are conservative. The company might also provide comments about 2006 which I'd also expect to be constructive.

Central European Media Enterprises: Recent Weakness Should Be Temporary

Central European Media Enterprises (CETV) shares have pulled back 10% since early October and about 15% since peaking in September. I think the current pullback will prove temporary with the company's early November earnings report providing a positive catalyst. 3Q results won't be exciting due to seasonally weak TV viewing in the summer but I expect the company to issue strong guidance for 4Q....

CETV's recent weakness can be tied mostly to faltering stock markets in Central and Eastern Europe and Russia. For example, since peaking on October 4, the main index in Prague (CETV's home market) has fallen 11%. Declines in other Central European markets have been as bad or worse. I believe most of the decline is due to increased risk aversion on the part of investors. The sharp decline in energy stocks has also contributed as many of the largest stocks in these markets are energy related.

Other potential reasons for the decline in CETV shares include Euro weakness and a new competitor in the Czech Republic. The Euro has been volatile but not that much changed since its decline from the $1.30s to the $1.20 range. As a U.S. company, CETV is exposed to Euro exchange rate fluctuations as the currencies of its operating countries closely track the Euro (CETV itself does very little Euro business). Dollar-based estimates may have to be adjusted for currency but the company goes out of its way to discuss results in local currencies so I don�t think downward adjustments to estimates that are solely currency related will be a problem.

In the Czech Republic, Modern Times Group bought the other private broadcaster, TV Prima. Some investors may fear the increased competition but I think the market offers enough growth for the next few years to accommodate Prima and CETV's Nova. As I have posted before, besides core growth, the Czech TV ad market will get a boost as advertising on still heavily watched state-owned TV is phased out through 2008 according to a new law.

Finally, I also think that some investors who piled into CETV in September were anticipating the possibility that CETV could be a seller in the frenzy of M&A in European media. CETV shares spiked up on the back of the buyout of SBS Broadcasting (SBTV). In a suddenly risk averse world, this takeover premium has quickly receded.

CETV is now trading at 11 times 2006 EBITDA estimates and about 22 times 2006 estimated EPS. I find these multiples quite reasonable given a mid-teens corporate growth rate and the one-of-a-kind asset base. SBTV was purchased for 16 times current year EBITDA, which would equate to $73 for CETV on 2006 estimates. Assuming 2007 shapes as another good growth year, I think CETV could move into the $60s solely on the basis of its own fundamentals over the next twelve months given its status as the only pure play on the emerging consumer economies of Central and Eastern Europe.

Recent European M&A is Good News For Central European Media Enterprises

Consolidation in European media continues at a frantic pace. Last week, Liberty Global (LBTYA) announced its acquisition of leading Swiss cable company Cablecom. On Monday, NTL Incorporated (NTLI) and Telewest (TLWT) announced their long awaited merger. Additionally on Monday, shareholders of SBS Broadcasting (SBTV) approved the sale of the company to private equity investors for 46 euro per share. Finally, on Sept. 30, Scandinavian company Modern Times Group announced the purchase of 50% of TV Prima, the No. 2 television broadcaster in the Czech Republic....

....With the exception of the NTLI-TLWT deal, each of these acquisitions was completed at a premium multiple of earnings before interest, taxes, depreciation and amortization. I think this indicates the relative immaturity of European media assets compared to U.S. media assets. Potential growth rates over the next several years are higher, especially in Western European cable, Central and Eastern European television broadcasting, and Nordic pay and free-to-air television.

A Pure Play
With the SBTV deal set to close this month, Northlake's only long position in the European media sector is Central European Media Enterprises (CETV). CETV is the only pure play on Central and Eastern European advertising and consumer spending with leading TV stations in the Czech Republic, Croatia, Romania, Slovenia, Slovakia and Ukraine. Pro forma for a full year of ownership of TV Nova in the Czech Republic, CETV should produce 2005 revenue and EBITDA of $537 million and $189 million, respectively. Pro forma year-over-year revenue growth should be about 18%. Pro forma EBITDA growth will be about 9%, held back the inclusion of the more mature Czech assets. Long-term EBITDA growth should be in the midteens, as rapidly growing Romania and Ukraine become a bigger part of the mix and Croatia moves from start-up losses to profits. TV Nova in the Czech Republic should also see its growth accelerate due to passage of a recent law that phases out advertising on the No. 2 and No. 3 ranked state-owned TV stations. CETV has a market cap of $1.5 billion, and daily dollar volume is about $7.5 million.

Recent Pullback

CETV shares have pulled back from their recent spurt that followed the buyout of SBTV. SBTV sold for over 15 times 2005 EBITDA providing a floor for CETV's valuation in the low $50s. The pullback accelerated on Tuesday and Wednesday, probably as investors became aware of Modern Times entry into the Czech market. Modern Times is a successful and experienced broadcaster in Northern and Central Europe so some fears of a stronger competitor for CETV's dominant TV Nova are reasonable. Central and Eastern European markets also declined sharply on Wednesday including a fall of over 3% in Russia. There also could be some fears about dollar strength as the euro fell below $1.20.

Attractive Valuation

I think the price paid by Modern Times for TV Prima provides further support for CETV shares. Prima produced 2004 revenue and EBITDA of approximately $58 million and $11 million respectively, compared to revenue of $208 million and EBITDA of $99 million for Nova. 50% of Prima was purchased for about $120 million, valuing the entire company at $240 million equating to about 20 times 2004 EBITDA. CETV is trading at 15, 14, and 12 times 2004, 2005, and 2006 EBITDA, respectively, and purchased Nova for less than 10 times 2004 EBITDA just six months ago.

Growth Potential

Clearly, the superior growth rates in Central and Eastern Europe and CETV's great success have increased the competition and pricing for acquisitions in the region. Growth via acquisition remains one of CETV's key strategies. However, after acquiring TV Nova and Croatia in the past year, CETV doesn�t need additional acquisitions to reach critical mass or drive growth over the next several years.

Buying Opportunity

I think the correct viewpoint is that media stocks perform best when M&A activity is high. In Europe, that is clearly the case. CETV's valuation has been validated by recent acquisitions activity while the company's growth outlook remains very bright, with 4Q05 estimates built on arguably conservative management guidance. Consequently, I think the current pullback in CETV shares will prove temporary. I plan to use recent weakness to establish intitial positions for new Northlake clients and round up any positions already held that are on the small side.

The next big event for the company shouuld be when CETV reports third-quarter earnings and provides detailed fourth-quarter guidance in mid-November. The company is also looking at acquiring a TV station in Turkey according to recent press reports. News on this acquisition or any other deals is possible at any time.

SBS Buyout Has Implications for Central European Media Enterprises

Yesterday's SBS Broadcasting buyout deal at 15 times 2005 management guidance for EBITDA has ramifications for valuation on Central European Media Enterprises (CETV). CETV is a faster growing company than SBTV because it is fully dedicated to higher growth emerging ad markets in Central and Eastern Europe. Consequently, I would argue that CETV would sell for a higher multiple on 2005 estimates than SBTV. Alternatively, CETV could sell based on forward estimates...

...On the flip side, CETV has more leverage than SBTV, operates in less developed and more risky political economies, and does not have full control of all of its license companies thus potentially restricting the ability to upstream cash to the corporate level.

At 16 times estimated pro forma attributable 2005 EBITDA after corporate overhead, CETV would be valued at the current price of $51 (it is pro forma for this year's acquisition of TV Nova which doubled the size of the company and it is attributable because there are significant minority interests in Romania, Slovakia, and Ukraine). A 16 EBITDA multiple on 2006 CETV estimated attributable EBITDA after corporate overhead works out to $60 per share assuming about $100 million free cash flow over the next 18 months.

I've tried to build in some conservatism by leaving the full amount of corporate overhead in the calculation. This means that the cost is valued at the 16 multiple and that a buyer would achieve no synergies. If CETV were to be bought I think it would be more likely that it would be a strategic buyer that could reduce corporate overhead since there would be some duplicative costs.

CETV's controlling shareholder, Ronald Lauder, was recently profiled in the Financial Times and indicated the company is not for sale. The article did state, however, that CETV had discussed a transaction whereby News Corporation would have become a significant shareholder. I suspect the transaction was an acquisition of a station in Central Europe where News Corp would have contributed financing and/or its own assets in the region which include broadcast TV assets in Bulgaria.

I am holding all client positions in CETV solely based on fundamentals looking to the seasonally strong fourth quarter to provide the next major catalyst. I've always felt CETV could end up in the hands of a major television conglomerate such as News Corp, Viacom, or European companies like RTL and Bertlesman. The buyout of SBS merely establishes the theoretical value of CETV, providing a baseline valuation that is at least in line with the current price and projected 2005 financial results.

Another Solid Quarter for Central European Media Enterprises

Central European Media Enterprises (CETV) shares responded positively to its earnings announcement last Thursday as the company reported a solid quarter and maintained a confident and bullish stance on its conference call. As is often the case with CETV's quarters, there was some variance on a country by country basis, but the overall thesis is firmly intact. I am looking to the seasonally strong 4Q to see broad-based strength across most of the countries the company operates in with a return to very strong growth in Ukraine likely to be a highlight.

In the latest quarter, Romania was the star with revenues up 42% and EBITDA up 102%. This masked slower growth in Slovenia, Slovakia, and Ukraine in the quarter although the results in those countries matched company guidance. CETV has different seasonality this year in terms of comparisons due to an unusually strong 1H04. This suggests growth rates will pick up in 2H05, especially in Ukraine...

...TV Nova in the Czech Republic was only owned for two months in the quarter but produced strong results. Nevertheless, management issued admittedly conservative guidance for Nova to compensate for (1) fears that it was being spruced for sale in 2004, and (2) a desire for CETV to increase investment in new programming and infrastructure to secure the long-term growth and franchise of the cash cow that will finance the company's expansion in emerging markets like Croatia, Ukriane, and possible future Central and Eastern European markets. Management said that the legislation restricting advertising on state-owned TV channels has not yet been signed into law by the President but would a nice positive. A Czech broker wrote yesterday that they believe a veto is extremely unlikely.

Non-operating news on the call was quite favorable with management noting that it looks like it will be able to gain control of the license in Ukraine as the new government updates the media ownership laws. CETV also said it would like to own a new network in Ukraine if the government allows it. Overall, these comments attest to the upside in Ukraine and support the idea that the transition of the country to a more stable and Western looking entity continues.

I continue to tweak my CETV spreadsheet to adjust for the new ownership in the Czech Republic and the new business plan in Croatia. I am trying to look at 2005 on a pro forma basis as though both those events were in place as of the start to the year. This allows me to focus on growth rates in 2006, which are key to the next leg of the story. Presently, I believe EBITDA growth in 2006 will be 15% for the total company but in the upper teens for just the four core countries of Romania, Slovenia, Slovakia, and Ukraine. EPS should be comfortably above $2 (John Tinker of ThinkEquity is using $2.30). On these figures, I think CETV shares can trade into the $60s which equates to 13 times attributable segment EBITDA and an upper 20s P-E ratio. I think these multiples are achievable given CETV's sustainable growth rate in the mid-teens and the company's status as the only pure play on the emerging consumer economies of Central and Eastern Europe.

Potential Boost for CETV in Czech Republic

There is some potentially positive news out of the Czech Republic for Central European Media Enterprises (CETV). Yesterday, the Czech parliament passed a law that will gradually phase out TV advertising on the two government-owned stations. It is not certain that this law will ultimately go into effect. However, if it does it is a nice positive as it will likely redirect tens of millions in annual advertising to CETV-owned TV Nova, which has market-leading viewing share in the low 40s....

According to a research report out of the Czech Republic, the two government stations had about $44 million in advertising in 2004. The law would lead to a gradual phase out of this advertising beginning next year and extending through 2008. CETV's TV Nova seems like to gain about 2/3rds of this advertising based on its relative ratings to the other private broadcaster in the country. This is a signficant amount given that Nova has 2004 revenues of $208 million.

All the recent hoopla at CETV over 1Q05 earnings and 2005 guidance overshadowed better-than-expected 2005 guidance for Nova, which is half of CETV. This law likely extends the double-digit growth at Nova though full implementation in 2008 if it goes into effect.

Central European Media Enterprises Clarifies 2005 Guidance

Central European Media Enterprises (CETV) shares have rallied sharply since the company announced it would be holding a follow-up a conference call to expand and better explain the 2005 guidance it gave on its 1Q05 conference call. CETV shares fell sharply after 1Q earnings and guidance were issued. The 1Q numbers were a bit light and the company gave 2005 guidance in broad terms that could have led one to believe that they were trying to mask troubling trends in 1Q05. The drubbing in the shares was compounded by the fact the company sold 5.4 million shares in secondary offering at $44.91 in late April. The shares suffered as new investors headed for the exits when the company disappointed investors. As summarized below, the follow-up call was very comforting and closley followed my feelings as outlined in my original discussion of the reaction to the first quarter.....

Recap Of The First Quarter Issues

As an investor in CETV for many years, I know that CETV's results on a country-by-country and quarter-by-quarter basis are lumpy. TV markets in Central and Eastern Europe are still developing and hit shows or new programming investments can lead to large variations in results at any one station. On top of this, CETV's business is quite seasonal with the first and third quarters being weak (typically accounted for 37-40% of yearly revenue). There have been numerous occasions over the last few years when 1Q/3Q results were "negative surprises" only to be followed by "positive surprises" when operating leverage kicked in during the high revenue 2Q/4Q periods.

CETV's 1Q05 results were also complicated by the inclusion of losses at a newly acquired station in Croatia. Losses were higher than expected in the quarter and the company hinted at sizable losses in 2005 continuing into 2006. On the 1Q call, management refused to specify the forecasted loss in 2005, which made interpretation of its guidance for 25% revenue growth and 15% EBITDA growth for the whole company in 2005 difficult to understand. Add in a shortfall in margins in Slovenia and Ukraine that went largely unexplained and investors responded by assuming a worst-case scenario.

Follow-Up Call Details

Fortunately, CETV management listened to analysts and large investors and hosted a follow-up call to clarify the guidance and offer expanded comments on 1Q. Management explained that Ukraine faced a timing issue as a popular Russian mini-series that ran in 1Q04 won't run until 3Q05. In Slovenia, a new employment law will pressure costs in 2005 but the overall market remains healthy. CETV also said organic revenue growth in the Czech Republic (50% of pro forma revenues) would be 8% in 2005, much better than expected.

Putting all the pieces together, the latest conference call made it clear that the company's guidance for 25% revenue growth and 15% EBITDA excluding the Czech Republic was in fact very healthy. Management also indicated that this guidance could be conservative. Plugging the new data into my spreadsheet, I still feel CETV can trade into the $60s on my 2006 estimates. My new pro forma 2005 and 2006 EPS estimates are $1.72 and $2.25. John Tinker of ThinkEquity has a 2006 estimate of $2.50. On an EBITDA basis, $62 works out to 12 times 2006 estimates, a level I find quite reasonable given the growth rate.

Certainly, the poorly handled 1Q05 call and the volatility revealed in the quarterly numbers will limit the multiple investors will place on CETV until a few more quarters put the 1Q05 questions to rest. I now think the shares will trade around the mid-$40s until results later this year give confidence to 2006 estimates at which point a move toward my price target should kick in.

Central European Media Enterprises To Clarify 2005 Guidance

CETV announced last night that they will hold a follow-up conference call tomorrow morning to clarify 2005 guidance provided on the first quarter results conference call held on May 10. The guidance caused confusion, particularly among new shareholders who bought shares on the secondary offering, and led to a sharp drop in the shares. I think tomorrow's call will provide specifics in line with my own analysis which I wrote back on May 11th but have yet to post. I also think the call is a smart move and will stabilize the shares and lead to a rebound. Today's gains are a good sign. Here are my thoughts from May 11th....

....I had a chance to talk to one of my better analyst contacts on Central European Media Enterprises (CETV) yesterday afternoon after I posted my initial comments on the quarter. The analyst had heard from a lot of shareholders. The big issue appears to be the guidance given on the call for 25% revenue growth and 15% earnings before interest, taxes, depreciation and amortization growth for 2005 on the stations in Romania, Slovakia, Slovenia, Ukraine and Croatia (excluding the acquisition of TV Nova in the Czech Republic which closed just a week ago). This guidance is inconsistent with a more bullish message sent on the recent road show for the equity offering.

Lack of Specifics Causes Confusion, Concern
I think that part of the problem is that the company offered vague guidance with no details on a country-by-country basis. Complicating matters was a statement by management that losses in Croatia (a new station purchased for just $20 million in 2H004) would be larger than expected in 2005 and possibly continue into 2006. However, management would not answer repeated requests for the size of the loss in Croatia, so investors are unable to determine whether margin issues are developing in the other countries or the weaker-than-expected guidance is solely related to Croatia. Since Slovenia and Ukraine reported margin declines in the just-reported first quarter, without knowing the losses in Croatia, investors are rightly concerned and confused about the guidance that implies a decline in margins from 30% in 2005 to 28% in 2005. With revenue growth as expected at 25%, there would be little reason to expect a margin decline given the operating leverage in the television station business.

The Picture Is Brighter Than It Seems
In the last three quarters, Croatia reported a cumulative EBITDA loss of $7 million. Investments in new programming have already improved ratings to a 14% share but the company plans more investments with the goal of getting to a 20% share. Consequently, I am assuming losses in Croatia of $9 million in 2005. Plugging this figure into my spreadsheet and working backwards suggests that the other four countries will have EBITDA growth of closer to 21% on stable margins. Romania and Ukraine will grow above 30%, Slovakia in the low double digits and Slovenia will bring up the rear in the upper single digits. I'd like a better understanding of the slowdown in Slovenia but if my assumptions about Croatia are correct, the picture is better than someone who listened to the conference call would have taken away.

Seasonality Is a Large Factor
Investors newer to the story may also not realize that quarterly results for CETV, particularly on a country-by-country basis, have been volatile over the last five years. Seasonality has played a major role in the volatility. The seasonally weak first and third quarters have accounted for just 37%-40% of revenue over the last over the last five years. This has often led to negative EBITDA surprises in individual countries in these quarters due to operating leverage inherent in television stations. Since CETV is investing heavily in programming to establish dominant ratings, negative leverage is enhanced in the first and third quarters. Positive surprises have occurred often in the second and fourth quarters when revenues receive a seasonal boost. Individual hit shows and elections can also lead to large variations in quarterly results. Management did a poor job explaining these things on the conference call.

Long-Term Story Is Intact
I still think my initial conclusion that the long-term story is intact but the shares will be sloppy and unrewarding in the short-term is correct. Valuation is hardly demanding at 11 times 2005 EBITDA and 20 times pro forma 2005 EPS even if growth is only 15%. I hate to sound like an apologist and defend an idea. However, sometimes taking a little longer term view is necessary in small-cap growth situations. I had not thought that would be the case for CETV in 2005, but I do think that is the right approach to take now.

Central European Media Enterprises Equity Offering This Week

Central European Media Enterprises (CETV) looks set to complete its financing this week for the acquisition of TV Nova, the largest and most successful television broadcaster in the Czech Republic. A review of the prospectus and several 8-Ks the company has filed indicate that all is well as the company....

....1Q results will be impacted by the usual seasonality (2Q and 4Q are seasonally strong and 1Q and 3Q are seasonally weak) as well as one-time items relating to the financing of the $680 million acquisition. Brief commentary on full year 2005 guidance suggests that there is no change in the outlook for another strong year of growth.

One issue did arise since the announcement of the 4.2 million share equity offering. The Czech Media Council has informed TV Nova that for the second time in a twelve month period it violated broadcasting standards. The violation appears similar to indecency issues in the United States. Two violations in aa twelve month period allow the Media Council to pull the license. I am told by a very large shareholder of CETV who spoke directly with management that the company has already spoken extensively with the Media Council and there is no chance the license will be pulled. CETV hopes to have this issue cleared up prior to the equity and debt offerings scheduled for this week but it is possible this could cause a delay in the deals. This morning CETV announced that two of the conditions on the purchase of an additional minority interest in TV Nova were met, including the agreement of the Media Council. Hopefully, this a good sign that discussions with the Media Council are proceeding favorably.

The financing package for the acquisition includes 4.7 million shares underwritten by JP Morgan and Lehman and 350 million Euro ($495 million) in fixed and floating rate bonds. The financing package is in line with my expectations and I still think CETV shares are headed much higher on the back of excellent station level results and a strong tailwind from the emerging consumer economies of Central and Eastern Europe. Television advertising, and in turn CETV, is one the only direct plays on this Central and Eastern Europe theme.

Central European Media: Plenty of Upside Remains

Central European Media Enterprises (CETV) has given back some of its recent gains including about 7% since the company reported earnings before the open of trading on Tuesday. Mostly, I think this is a sell the news reaction to a stock that moved from $35 to $55 since late January. The fourth quarter 2004 earnings report was fine, slightly ahead of analyst estimates...

As per its custom, CETV will not give 2005 guidance until the first quarter is reported in May, but based on general commentary on the call, it appears that growth rates of advertising throughout Central and Eastern Europe are holding firm. I see no reason that CETV's attributable operating cash flow (EBITDA) should not grow by at least 15% in 2005 against $141 million earned pro forma 2004 (assuming TV Nova in the Czech Republic were owned for both years). On this same pro forma basis, John Tinker of Think Equity is carrying earnings estimates for 2005 and 2006 of $2.02 and $2.52, respectively. On a P-E basis, this places the shares 25 and 20 times earnings 2005 and 2006 estimated earnings. On an EBITDA basis, the shares trade at 13 and 11 times station level EBITDA and 15 and 13 times EBITDA less corporate overhead. I find all these multiples reasonable and believe the estimates are conservative, especially in 2006. In a growth starved world, I believe investors will pay up for CETV and the shares will head into the $60s in 2005 and $70s in 2006 if the stock market cooperates and provides a little tailwind.

I also want to mention that the company announced that they were not Sarbanes-Oxley compliant at the end of 2004. I think this contributed to the sharp downdraft on Tuesday much more than any worry about the fundamentals. The accountants found two areas relating to the accounting for the company's ownership of its subsidiary in Slovakia that have caused the company to restate income statement and balance sheet items for 2002, 2003, and 2004. There were no issues with operations just mistakes in how the reults were consolidated. The total amounts involved appear to be very small, totaling several million dollars. I never like to brush off an accounting issue, but this appears to be immaterial and it is worth noting that the auditors gave an unqualified opinion to the 2004 audit.

More Good News From Central European Media Enterprises

On March 2, 2005, Central European Media Enterprises (CETV) shares rose over $6 after the company announced it had acquired an additional 29% interest in TV Nova to add to its pending acquisition of a 56% interest. Both deals are projected to close in the second quarter of 2005. The original deal, announced last December 13, called for CETV to acquire 56% of TV Nova for $642 million, composed of $529 million in cash and 3.5 million shares of CETV, then valued at $32.29 per share. The additional 29% is being acquired at an effective cost of $0 as any payments made to the seller will be deducted dollar for dollar from the $642 million purchase price on the 56% stake....

During the December conference call discussing the acquisition, and in subsequent investor meetings, CETV CEO Michael Garin explained that upon filing of its 2004 10-K, details of the company's ability to cheaply increase its ownership in TV Nova would be revealed. He hinted that all or part of this 29% stake was tied up in legal proceedings and would be available to CETV upon resolution. The company has not filed its 10-K yet, but obviously the legal issues were resolved.

In the December 13, press release CETV stated that in 2004 TV Nova was projected to have revenues of $222 million and EBITDA of $100 million (EBITDA is also known as operating cash flow and equals earnings before interest, taxes, depreciation and amortization. It is a commonly used measure on Wall Street, especially for media companies and in mergers and acquisitions). Using just the original 56% stake implies that TV Nova was being valued at $1.15 billion, implying a multiple of 11.5 times EBITDA for what is arguably the most successful TV station in Europe with an all day audience share over 40% and an EBITDA margin of 45%. While more mature than other Central European television markets, the Czech Republic is likely to sustain an 8% to 10% growth rate in advertising for the next several years assuming the economy grows in line with expectations.

At the time of the announcement, I liked the deal (link to earlier post) and thought it was reasonably priced. TV Nova almost doubled the size of CETV making it a much more substantial company in the eyes of investors. The deal also resolved the issue of how CETV would use its debt free balance sheet and $200 million cash balance. Management had made it clear that it was seeking large acquisitions, so the purchase of a sizable, well established station in a country that is looking more Western European every day added stability and credibility to the CETV story. Effectively, CETV is trading a lower, but still well above average, long-term growth rate for stability in its financial results and reduced political risks.

The latest deal means that CETV is acquiring 85% of TV Nova for $642 million, lowering the multiple to just 8 times even after considering the run-up in the value of the 3.5 million shares. An 8 multiple on trailing EBITDA for a high quality asset growing at 10% per year or more is very attractive by Wall Street standards and less than the multiple for the stocks of very mature television broadcasters in the United States.

Wednesday's jump of $6 is not surprising given that the company acquired $30 million in EBITDA for nothing. At Tuesday's close, CETV was trading at 15 times 2005 estimated EBITDA, similar to multiples for slower growing Hispanic TV assets in the United States. While some of the recent run in CETV shares was in anticipation of an announcement of this sort, the new deal adds at least $400 million in value to CETV (13 multiple of $30 million) or $12 per share against 33.5 million pro forma shares.

My new target on CETV based on 2005 pro forma estimated EBITDA of $155 million is $59 assuming a 15 multiple. On 2006, assuming EBITDA grows 16% and the multiple contracts to 14 times, a target of $75 is achievable. I plan to buyer so CETV again if it pulls back a few dollars and remains steady and time passes so we are closer to 2006.

Those of you who have read this far probably have nothing against valuing media companies on EBITDA multiples. However, for those who do, John Tinker an analyst I know at ThinkEquity just posted a pro forma 2006 EPS estimate of $2.52 INCLUDING 85% of TV Nova, while European based Deutsche Bank analyst Wlodek Giller had a 2006 estimate of $2.45 BEFORE the additional 29% interest is acquired for nothing. Assuming a 25% tax rate on $36 million in 2006 TV Nova EBITDA (2 years of 10% growth), his estimate should rise by 80 cents. The mid-point of the two estimates is $2.88, placing CETV at 18.4 times 2006 estimates today. At my current 2006 target of $75, the multiple would be 26 times, not out of line for a growth stock in my opinion, and a slight discount to Univision's 2006 multiple of 27.7 times.

SBS Broadcasting Makes Smart Acquisition

SBTV announced the acquisition of CMore Group AB today. Here is a description of CMore taken directly from the press release:

CMore Group is the leading Nordic pay entertainment provider with over 770,000 subscribers in Sweden, Norway, Finland and Denmark. The only provider of both premium sports and premium movies in the Nordic region under the Canal+ and CMore brands, CMore Group enjoys market leading positions in Sweden, Norway and Finland. The channels are distributed primarily by direct- to-home satellite (DTH), cable, broadband and increasingly by digital terrestrial transmission (DTT).

The market liked the deal and SBTV shares rose 8% today against a poor day for the major market indices.....

I like the deal as well. SBTV already operates traditional broadcast television, analog cable, and radio stations and networks throughout Scandinavia. Management knows this business well and should be able to gain synergies in terms of cross-platform advertising sales and subscriber growth through cross-promotion.

The deal appears attractively priced at 270 million euros. CMore has 20 million euros in cash, so the real cost is 250 million euros. On the conference call, management very confidently stated that 2005 operating cash flow for CMore would be in the "upper mid 20 million range." I take that to mean to 27 million which would mean the acquisition is for less than 10 times current year cash flow. This is a good price for any established media property based on comparable transactions.

SBTV management was very confident and knowledgeable about the deal on the conference call. The key takeaway is that penetration of pay TV services in Scandinavia is just 11% of the households. This compares to about 25% in France and the United Kingdom which have similar television industries. The Scandinavian countries are eliminating analog delivery of television signals and replacing them with digital signals over the next few years. This means that every home will need to have a set top box to receive TV signals. SBTV believes that once a set top box is in the home it will be much easier to sell a package of pay TV networks to customers. Households in the region have only five TV channels to choose from right now if they don't subscribe to cable or satellite TV. CMore has locked up key sports programming (including European soccer) and most of the major Hollywood studios for movies. Once set top boxes are in homes, SBTV will cross promote on its radio and TV stations to drive subscriber growth. Recent trends suggest that there is a multi-year opportunity for over 10% subscriber growth.

In summary, SBTV is buying a business that will enhance its growth rate at a reasonable price. The company knows the business they are acquiring well and appears able to hit the ground running when the deal closes in the second quarter of 2005. SBTV has 250 million euros of cash, 143 million euros of debt and should generate over 80 million euros of free cash flow in 2005 before the CMore deal. SBTV is wisely using its financial strength to enhance its growth profile and increase its long-term free cash flow production. At less than 8 times cash flow, SBTV shares have plenty of upside after today's moves as similar stocks trade for 10 to 12 times cash flow in the United States and Western Europe. Northlake remains long SBTV shares with a price target of at least $48 based on 2005 estimated financial results.

CETV Management in U.S.

Over the lunch hour today, I listened to a presentation by CETV management to clients of Jefferies and Company brokerage firm. The CEO is based in NY but the London based CFO and COO were in the States to present the 2005 budget to the Board. Based on commentary on the call, it appears the story is intact and 2005 is setting up to be another excellent year...

CETV expects to double in size off its 2004 revenue base in the next four years as a leading beneficiary of rapidly rising disposable personal income in its Central and Eastern European markets. Management also expects operating cash flow margins to rise from the current 30% to 35% within the next three years. Doubling revenues in four years, implies a 19% top line growth rate, which with expanding margins means that cash flow should rise 23% per annum.

Rising disposable income in the region will lead to increasing advertising spending per capita. According to CETV, Eastern European countries have a $17.44 per capita advertising spend, while Western European countries have a per capita of $46.90. Prior to its acquisition of the dominant TV network in the Czech Republic, CETV's markets (Slovenia, Slovakia, Romania, Ukraine, and Croatia) have a per capita spend of just $5.04. CETV's figure is held down by very low per capita's in Ukraine and Romania, which have populations of 48 million and 22 million, respectively.

Regarding current trends, management said there was a slight pause in Ukraine ahead of the second round of voting. It was not clear if the pause had lifted yet but management was "extremely positive" on Ukraine given the outcome of the Presidential contest. Management plans to build Ukraine on the model that it has used very succesfsully in Romania. In the seasonally weak third quarter revenues in Romania were 2.3 times those of 3Q01 and cash flow was $4.4 million vs. a loss of $2.1 million in 2001.

Management also commented that the 2005 outlook in Croatia is not as optimistic as the other markets due to higher than expected content costs as the State television network is spending wildly on programming. Fortunately, Croatia is a small market which will produce about $6 million in negative operating cash flow in 2004 against pro forma companywide attributable operating cash flow of $106 million.

In further comments, management noted that the Croatian government is violating its license by showing programming beyond its charter. If Croatia were in the EU, it would be in violation of EU rules on this matter. One benefit of the CETV story is that as Central and Eastern European countries move into or toward the EU, it improves business conditions for the industry leaders.

Overall, it was a good presentation. The fourth quarter "will reflect the overall good year" enjoyed by CETV. Further clarity on the financing, projected growth, and path to increased ownership of TV Nova is the Czech Republic will be released in about four weeks. I expect the news to be favorable. I also expect an optimistic 2005 outlook.

Given the 20% plus growth rate projected over the next several years, I see no reason that CETV can't maintain its current 15 multiple on 2004 operating cash flow on 2005 estimates. If so, a price target in the mid-$40's is realistic, providing 20% upside from current levels.

Motley Fool Likes CETV

Here is a link to a story that ran on Yahoo reproducing a recommendation of CETV by one of Motley Fool's contributors. It is a good summary of the company and falls short only in the valuation section. CETV and other media companies are valued based on their cash flow. On that basis, CETV shares are reasonably priced compared to high growth U.S. media companies such as those serving the hispanic market.

http://biz.yahoo.com/fool/050125/1106673540_1.html

Buying Central European Media Enterprises Again

Central European Media Enterprises (CETV) was repurchased yesterday per my plan to wait for a pullback to the mid-$30s and a resolution in Ukraine, both of which occurred this week...

Key Points

* Price decline and a good outcome in Ukraine set up a buying opportunity.

* CETV is a direct play on emerging consumer economies in Central and Eastern Europe.

* Primary near-term risk is the financing of an acquisition in Czech Republic but this could also raise the profile of this underowned and underfollowed stock.

CETV Acquires TV Nova

CETV is the largest television broadcaster in Central and Eastern Europe with leading stations in Slovenia, Slovakia, Ukraine, Croatia, Romania and the Czech Republic. The company recently announced a major acquisition of TV Nova in the Czech Republic. The acquisition is atractively priced at about 10-11 times operating cash flow. Nova will represent almost half of 2004 estimated pro forma attributable EBITDA of $112 million. Nova and the Czech Republic are mature compared to CETV's other markets, so the acquisition trades a slightly lower overall corporate growth rate for more stability. Nova still offers growth of 8% to 15% in operating cash flow, but that is below the 20% growth rates likely in CETV's other markets.

CETV will need to raise about $300 million to finance the acquisition. The company can easily borrow the money without straining the balance sheet. However, I think some equity might used to preserve flexibility if other acquisitions become available in the region. New equity issuance can depress share performance temporarily but it also is an opportunity for a smaller company to raise its profile. CETV has minimal Wall Street coverage and none from major firms. Any equity offering would likely be through a big firm that would introduce the company to all the major mutual funds, hedge funds, and money managers.

CETV Benefits From Favorable Yushenko Victory in Ukraine

CETV was sold around Thanksgiving due to the election uncertainty in Ukraine. Ukraine represented over 20% of 2004 estimated attributable EBITDA prior to the Nova acquisition. Fortunately for CETV, the outcome in Ukraine is about as good as could have been expected. The opposition leader, Yushenko, won an election that was deemed clean by all observers and validated by the Ukrainian Supreme Court. Best of all, major countries and leaders throughout Western, Central and Eastern Europe all expressed support for Yushenko and pledged to assist the transition of Ukraine to a capitalist democracy.

Ukraine had the highest GDP growth in Europe in 2004 at 12%. I still expect a slight shortfall in Ukraine in the 4Q04 and restrained 1Q05 guidance. However, investors will rightly look past this period and see a nation of 48 million people just beginning its evolution as a consumer-based economy.

CETV To Prosper From Emergence of Central and Eastern Europe

CETV is an excellent play on the now widely acknowledged upturn throughout Central and Eastern Europe. Television advertising should be an early cycle way to play the region as local and multi-national companies look to establish early brand identity and loyalty with newly emerging consumers.

Valuation and Target Price

Like most media stocks, I value CETV on the basis of enterprise value to EBITDA. CETV shares are trading at 13.7 times 2004 pro forma estimates, an appropriate multiple for this high growth company (estimated 2005 pro forma EBITDA growth of 17%). Hispanic media assets in the U.S. with lesser growth rates trade at similar or higher multiples. Assuming CETV holds this multiple on 2005 pro forma estimates, my target price is $43, offering 20% upside.

Out of CETV Until Ukraine is Settled

Recently purchased positions in Central European Media Enterprises (CETV) were sold on Friday at a small loss due to uncertainty over the political situation in Ukraine. The concern is solely short-term as CETV's long-term opportunity as the leading TV broadcaster in rapidly growing Central and Eastern Europe is an extremely worthwhile investment thesis....

In the last 12 months, CETV earned about 22% of its revenue and operating cash flow in Ukraine. Ukraine has been CETV's fastest growing market in 2004 with revenue growing approximately 60% and operating even faster off a small base.

Very recent contact with CETV management confirms that thus far there has been minimal impact from the elongated election process in Ukraine. Since campaigning began in October, CETV's Studio 1+1 has run its regular programming with normal advertsing levels. Even during the turmoil of the past week, operations have remained on track. CETV management feels any outcome short of violence will be a big positive in the long-term for its Ukrainian station as the country is moving steadily toward a stronger economic base.

Northlake's concern is with the 2005 outlook in Ukraine. As of now, it looks like uncertainty on the government of Ukraine could extend for another month. If multinational advertisers decide to play it cautiously in making early 2005 commitments, CETV's first quarter could face uncertainty in one of its larger markets.

Northlake views this situation as temporary and would quickly repurchase CETV, even at higher prices, if the situation in Ukraine is resolved without violence. A weak first quarter in Ukraine is not particularly troublesome as it is a seasonally slow quarter. More importantly, Ukraine remains on a path toward economic liberalism and is a huge opportunity with a population of 48 million. Further, all of CETV's markets (Slovenia, Slovakia, Romania, Croatia, and Ukraine) are early in their economic development and offer GDP growth rates 2 to 3 times that of the U.S. and Western European economies. Advertising growth rates should be at a significant premium to GP growth. CETV is a unique long-term investment opportunity. It is the short-term that might prove worrisome, so moving to the sidelines temporarily seems prudent.

CETV To Open NASDAQ Today

Central European Media Enterprises is ringing the opening bell at the NASDAQ today to celebrate the 10th anniversary of is stock listing. CETV is a unique play on the development of Central and Eastern Europe economies. Below are excerpts from comments by Ronald Lauder and Michael Garin, CETV's most senior executives. These comments succinctly capture the broad rationale for Northlake's interst in CETV shares....

Ronald S. Lauder commented, "The fall of the Berlin Wall unleashed a tremendous thirst for freedom of choice across many aspects of post-Communist life, including news, entertainment and consumer products. We viewed this as an extraordinary opportunity to build early-stage leadership positions in these young commercial media markets. With the support of the public markets, we were able to make our vision a reality, and in so doing, we contributed to the transformation of life and commerce in the region. As we approach a new decade, we are in an outstanding strategic position to benefit from the economic growth and political development across our markets. Today, we acknowledge the role that the capital markets played in CME's development and thank our investors for their invaluable support."

One of the fastest growing media companies in the world, CME is recognized as an early pioneer in the development of commercial television broadcasting and advertising in Central and Eastern Europe. In 1993, CME was formed with the goal of establishing locally branded television franchises in post- Communist countries concurrent with their transition to advertiser-supported media marketplaces. The Company completed an Initial Public Offering in 1994, and with the support of its investors, implemented a strategy that called for entering developing markets early, forging strategic alliances with experienced local partners, educating potential advertisers and delivering the highest quality local and international programming. For millions of viewers, CME's networks represented their first exposure to independent news and entertainment programming, after decades of television that was limited to government-controlled content. Following a decade of growth and investment in the region, no other media company is better positioned to take advantage of the continued growth of consumer spending and commercial advertising in Central and Eastern Europe.

Michael Garin commented: "The long-term outlook for our markets is exceptional. The expansion of the European Union has supported increased stability and economic growth in the region, with direct foreign investment on the rise. Local and international advertisers are increasingly utilizing commercial television to establish their brands and market their products and services to consumers in the region. And, viewers are benefiting from the increased news and entertainment content choices we deliver to them through free over-the-air television. Given our leading market shares, solid balance sheet and excellent relationships with our local partners, we are ideally positioned to take advantage of these trends and to continue to post strong financial returns for our shareholders."