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.