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August 21, 2008

CETV Trades Down Then Gets An Upgrade

Central European Media Enterprises (CETV) shares sold off heavily last Tuesday, dropping over 10% mid-day and closing down about 7% to set a new 52 week low. A number of factors are at work: worries about Russia's intentions towards Ukraine, dollar strength, emerging market GDP worries, lousy emerging market stock markets, fears about an expensive acquisition of the #1 station in Bulgaria, and the breakdown in the chart. While none of these factors are impacting the superb growth profile and operating fundamentals, taken together they are enough to scare off buyers leaving the playing field to shorts and longs with a weak stomach.

In response to the weakness, on Wednesday, Merrill Lynch upgraded CETV to a buy with a target of $88. Prior to the sell-off, on Monday, Smith Barney initiated coverage with a neutral rating even as they established a target of $100. Both upgrades addressed the issues....

....The Merrill upgrade acknowledged the buying opportunity caused by the stock weakness and also noted that based on conversations with management and advertisers so far there appears to be no slowing in any of CETV's Central and Eastern European markets. Merrill also noted that even after the dollar rally currency remains very favorable with the Czech Koruna, CETV's largest market, still up 20% vs. the dollar on a year over year basis. Merrill is using at or above consensus estimates and notes that it had had already assumed dollar strengthening in 2H08 and 2009.

The Smith Barney initiation was made with well below consensus and guidance estimates for 2008. In fact, based on YTD results, Smith Barney is assuming an unrealistic slowdown in several countries, especially Romania, that is not supported by current facts and 3Q to date due diligence. My valuation argument is supported by the fact that Smith Barney believes that in its worst case scenario the shares are worth $80 and thus already more than discounting a massive operating level slowdown.

Nothing really new here for those of you who have followed my extensive writing on CETV. I remain very positive on CETV shares and have not changed my confidence level in my $130 plus target for the shares. A little improvement in investor sentiment toward emerging markets, particularly those within Russia's sphere of influence, could pop the shares 15-20% in the short-term. Besides that, the late October analyst meeting is probably the next identifiable bullish catalyst.

Posted by Steve Birenberg at August 21, 2008 08:05 AM in CETV