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February 26, 2009
CETV: Macro Outlook Takes Company and Stock Out of Management Control For Now
Central European Media Enterprises (CETV) reported mixed 4Q08 results excluding impairment charges and currency impacts. Commentary on 2009 was much bleaker than the company had previously admitted but was more or less in line with recent analyst comments and estimates. In fact, Goldman this morning made virtually no changes to its model.
The story on the stock for the short-term is simple: If Eastern Europe continues to implode, the stock is going lower. However, any sign of stability will allow investors to see huge underlying value.
I sold stock for many Northlake clients yesterday as I realized much too late that the possibility exists that the stock could head to $2-3. I really do not believe that will happen but given the stock market and macroeconomic environment the possibility it does is much higher than I previously thought.
The stock is completely hostage to macroeconomic issues. The accelerating deterioration in Eastern European economies and the associated impact on their currencies leaves the company with no control over its revenues. Management has implemented its most draconian budget and will cut costs 20% in 2009 through a combination of headcount reductions and reduced programming purchases. Years of experience with the operating management gives me confidence that cost reduction goals will be met.
Losses in startup markets of Ukraine and Bulgaria obscure still highly profitable operations in other countries. Elimination of these losses, which is possible through shutdown or sale if conditions materially worsen, would enhance enterprise value by several hundred million dollars. Against 42 million outstanding shares, this could add $5-15 to the stock price. Furthermore, stability in Eastern Europe would allow growth to resume and currencies to strengthen. This would allow the multiple to expand again and estimates in out years to rise. This could add another $10-20 to the stock.
For now, the stock will remain pressured by the dire global economic outlook which right now has Eastern Europe at its epicenter. The stock could easily go lower. Assuming the company comes out the other side of this crisis within the 2009/10 time frame, the stock will be much, much higher. Unfortunately, for now, it is hard to assume conditions improving.
Posted by Steve Birenberg at February 26, 2009 09:32 AM in CETV
the market seems to be in free fall.micc is having a huge drop today.even when severely oversold,the market seems to mount only one day or even shorter rallies. the new administration is being very poorly appreciated by wall street.do you think a true depression is pending/is it time to get out of the market altogether?are there any "good " sectors left?
Posted by: mp at March 2, 2009 09:28 AMThere are no good sectors as long as the downtrend remains in place. Technology tries to act well and could lead rallies.
The market is much more frustrated with the new Administration than the average person. Obama has a different time frame than Wall Street which remains worried about tomorrow as much as next year. This poses a risk as the daily market drubbing could change the average person's view.
I am more worried now that the global economy will take another substantial leg down. This is what global markets are worried about and reflecting. Then again, substantial resources are being devoted t stemming the decline and given time they should stabilize things.
Currencies very weak today with many emerging market currencies setting new lows. This is one thing hurting MICC. Also, they announced the retirement of the CEO. I am not sure if that is unexpected news but the current CEO is well regarded so if this news is a surprise it is understandable that it would hurt the stock.
I think we are grossly oversold and slightest piece of good news will set off a big rally. The timing is right for that to happen this week. I would not be a seller into the teeth of this declien but I do have significantly higher cash reserves than I had to start the year.
Posted by: Steve at March 2, 2009 09:37 AM