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November 20, 2008

Trying to Explain Why I still Like CETV

It is embarrassing to write about Central European Media Enterprises (CETV) given that I have owned it for Northlake clients and bought more and spoke positively about it all the way down, but I am not one to hide my screw-ups. This column is a bit long, but I owe clients and readers a detailed explanation.

The stock hit a new low on Tuesday on very heavy volume and is now down almost 90% this year, with most of the drop coming in a slide from $75 to $12 just since Sept. 12.

The stock is under siege from a bevy of macro problems, including

1. rapidly decelerating GDP growth in Central and Eastern Europe,
2. the almost daily collapse of the Russian stock market,
3. political instability and the IMF bailout in Ukraine,
4. very weak emerging-market currencies vs. the dollar,
5. global weakness in advertising, and
6. massive multiple compression for US-based media stocks.

Sadly, in hindsight, I can see how these factors would cause the stock to trade to current levels.

At its Oct. 23 analyst meeting when the stock was in the mid-$20s, CETV lowered guidance but only due to foreign currency. Almost all revenues are in currencies that have fallen by 30% since mid-September. In local currency, CETV maintained its 2008 guidance, with some countries performing better than expected (the Czech Republic and Romania) and others worse (Ukraine). On 2009, the company offered some preliminary comments with a reminder that it usually gives year-ahead guidance in May.

As of a month ago, the company was saying that in local currency, 2009 would be up about 10% and margins would be maintained. The company also said it could maintain margins in an environment as bad as local currency revenue down 20%. This final comment came with a reminder that in the last crisis in Central Europe in 1998 when Russia defaulted, none of CETV's markets went to negative local currency growth.

Analysts have cut 2009 forecasts far beyond management's preliminary guidance, with most expecting local currency growth to be up or down low single digits. With currency moving sharply against the company, U.S. dollar EBITDA estimates have fallen, with a worst-case estimate of down 25%; most estimates are around down 10%.

CETV does have two significant positive swings in dollar-denominated EBITDA in 2009 that will happen almost no matter what the ad environment, due to turns in Ukraine and Croatia. In Ukraine, CETV now has management control of the operations for the first time, which should lead to aggressive cost-cutting and improved efficiencies. CETV is also incurring one-time write-offs in 2008 due to bad programming decisions by prior management, which will disappear in 2009. In Croatia, CETV's station has matured to the point that fixed costs are now covered, providing positive operating leverage, which virtually guarantees a swing from losses in 2008 to profits in 2009.

I believe flat dollar-based EBITDA in 2009 is a real possibility assuming there is positive local currency revenue growth. Obviously, the current stock price and those selling or shorting at these prices don't believe management or me. They must be assuming a collapse in local currency revenue growth and/or the currencies to which the company is exposed. After all, the stock is trading at just 5.6 times the low EPS estimate and 4 times 2008 segment EBITDA.

The company has $1 billion in debt but has cash availability of almost $400 million via bank lines, which is far more than it needs to fulfill its operating plan for the next several years.

This stock price is absurdly low given the fantastic record of management, the long-term growth story of advertising in Central Europe, indications of growth from 40% of sales for 2009 in the Czech Republic already on the books, a private market value that is 5 to 10 times the current price if credit markets were functioning, and the fact that the company is presenting at a Morgan Stanley conference in Barcelona today and has already released its presentation, which affirms all commentary from the Oct. 23 analyst day.

You read that right. The company is another 30 days down the line in the meltdown of the global economy and its stock price is in the cellar, but the company is reaffirming its comments on local currency growth in 2009.

Others obviously disagree, and they have been right if the answer is measured solely by the stock price. I bought more stock yesterday, averaging down between $12.50 and $13.

Posted by Steve Birenberg at November 20, 2008 08:15 AM in CETV