Central European Media Enterprises (CETV) reported excellent 4Q07 results easily beating estimates on revenues, EBITDA, and EPS. Revenues and EBITDA grew 40% and 33%, respectively, with all six countries where the company owns TV stations or networks beating my estimate for revenue and five of the six countries beating my estimate for EBITDA. To gain some sense of the magnitude of the beat, my revenue estimate was $286 million and the company reported $301 million. For EBITDA, I was looking for $111 million and the company reported $129 million.
For the year, revenue and EBITDA grew 39% and 46%, respectively. For 2008, I am looking for 20% revenue growth and slightly expanding margins to drive 26% EBITDA growth. Free cash flow is beginning to be meaningful and could reach close to $100 million in 2008. In its conference call presentation, management said that it would to double revenues over the next five years with margin expansion leading to even faster EBITDA growth. Given the recent track record of consistent 20% plus annual growth and the rapidly growing ad markets throughout Central and Eastern Europe this is very reasonable expectation.
The shares trade at less than 11 times my 2008 EBITDA estimate ascribing no value to the company’s rapidly growing but not yet profitable operations in Croatia and the #2 or #3 position of its internet properties in most of the countries in which it operates. Doubling revenue in five years with margin expansion indicates that revenues will grow about 14% per year with EBITDA slightly above that rate. Given current forecasts for 2008 advertising growth in Central and Eastern Europe, higher growth seems likely at least in 2008.
With US media companies struggling to grow at 5-10% trading for 7-8 times EBITDA, I find the shares of CETV to be way too cheap. Assuming 18% growth in 2009, a 12 multiple on forward estimates would get the shares to $130. All it will take to get the shares moving again is a decent market that allows investors to start having confidence in the future and fewer worries about the stocks perceived as risky. I think it is a good bet that CETV shares and management team will continue to deliver for at least the next two years….

….You may ask if the numbers and outlook were so good, how come the shares traded off yesterday? I think that is a good question. Volume was not heavy so I suspect it was just a sell the news reaction in a bad market day. Some investors may feel that the great numbers received too much of a tailwind from favorable currency. However, in local currency, CETV grew at least as fast as its markets in every country but Romania. Don’t cry for Romania which grew by 45% in local currency slightly less than the 50-60% local currency growth of its ad market. Other investors may have been put off by the company’s decision to invest capital and operating expense in Ukraine in 2008 at the expense of margins. Given that Ukraine’s ad market is growing at 30% a year and that it has by far the largest population of any CETV market and that there are definite parallels between Ukraine and Romania and that CETV is getting full control of its Ukrainian operations in 2008, this seems like a smart investment. Just to give you a sense of the upside in Ukraine, in 2003, revenues in Romania were just over $50 million. In 2007, revenues reached $215 million. There is solid reason to believe management statements that Ukraine will grow to be the company’s largest market in the next 5 to 7 years off the 2007 revenue base of $125 million (The Czech Republic was #1 in 2007 with $279 million in revenues.)
The bottom line is CETV has been and remains the best growth story in media with a strong management team that has consistently produced superior results. I’ve owned the shares since just after 9/11 and been richly rewarded. I expect the shares to move up 50-100% in the next few years. Just remember that CETV shares have volatility associated with emerging market investments. That means you need ignore the day-to-day movements in the shares and keep your eye on the big picture. It’s a pretty picture.