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March 17, 2005

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.

Posted by Steve Birenberg at March 17, 2005 12:18 PM in CETV