I attended Central European Media Enterprises (CETV) Investor Day in Prague on October 15th. The stock is presently not widely held by Northlake clients but I continue to monitor it closely as I strongly believe that when advertising growth returns to Central and Eastern Europe, the company’s results will have a V-shaped recovery and the stock will respond.
Unfortunately, the near-term news delivered at the meeting was disappointing. 2009 results, particularly at the profit level, are going to fall well short of expectations. Two factors are at work. First, despite a rebound in the region’s economies, multinational advertisers are sitting on their hands. It appears there will be no rebound in local currency advertising in revenue in the fourth quarter as I had previously expected. Second, the company is being forced to spend more to defend its ratings lead in most of its markets. Whether this is a long-term issue or one that is being forced on the company due to the brutal environment for all of the region’s broadcasters is open to debate. The street is skeptical but I think there is a possibility that the fight for advertising dollar share may relax modestly when advertising dollars begin to flow again in 2010 and 2011.
Entering the meeting I was hoping to hear that 2009 thru 2011 EBITDA would follow a $100 million, $200 million, $300 million pattern. New guidance for 2009 is just $65 million and while the company is guiding to a return to positive local currency ad growth in 2010, it now appears that EBITDA may not reach $200 million until 2011. And that of course, assumes the global economic recovery does not falter.
With the balance sheet still heavily leveraged, negative free cash flow, and significant ongoing losses in the developing markets of Bulgaria and Ukraine, CETV shares look quite expensive. As a result, I think there are better media stocks to own until there is evidence of a stronger ad recovery in the region and reduced losses in Bulgaria and Ukraine.
Not all is lost, however. I still think the shares can reach $50-60 in a full fledged recovery as EBITDA will ramp quickly assisted by a reversal to positive tailwinds from foreign currency translation. Like many companies under pressure from the global economic crisis, CETV will look worse in hindsight once the environment improves. The long-term growth story of Central and Eastern Europe TV advertising remains intact and CETV has by far the best set of assets to exploit the opportunity.
For now, concerns about the overly leveraged balance sheet and ongoing major losses in Bulgaria and Ukraine will dominate. Thus, CETV is a stock to monitor rather than own. But I fully expect to own it again at some point in 2010 assuming the global economic recovery continues.
Disclosure: CETV is held by a few clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts.