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.