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October 30, 2008

CETV After The Analyst Meeting and 3Q Earnings

Over the past eight days, CETV held its annual analyst meeting and reported its 3Q08 results. These events seem to have halted the punishing decline in the shares which fell from the upper $60s at the end of September to a low of $18 this past Tuesday. As f this writing the stock has rebounded to $25.

The decline got started when investors lost confidence in 2008 and 2009 growth due to the initial strength of the dollar and fears of a global recession that might be especially severe in Europe. The decline accelerated last week when emerging market currencies collapsed leading to the assumption that 2009 results would have to be down sharply due to currency translation and a now unavailable decline in advertising in Central and Eastern Europe.

Throughout this period I have been in very close contact with the company and my street contacts....

Management acknowledged right away that on a US dollar basis previously expected results would not be met. CETV gets 100% of its revenue and profits in foreign currencies so when the dollar appreciates financial results suffer. Management also has consistently stated that in local currencies they see no change to their 2008 forecast and still expect double digit revenue growth in 2009. They point to sales of 30% of their inventory for 2009 in the Czech Republic, by far their largest market, at double digit gains as evidence. They also note that when Russia defaulted in 1998 and a similar crisis engulfed emerging markets, advertising growth continued unabated in Central and Eastern Europe.

I have great confidence in this management team and can state for a fact that in the past seven years they have never promised something they did not deliver. Obviously, investors feel differently. Analysts are dramatically lowering forecasts despite management reassurances. Goldman Sachs expects 2009 operating cash flow to fall 20%. Merrill Lynch cut forecasts to a small decline.

In my opinion, the current stock price assumes Goldman is correct. However, even if they are, the long-term value remains in CETV. On Goldman's estimate the stock trades at just 7 times operating cash flow, an average multiple in today's media landscape despite years of 20% plus local currency growth. Furthermore, Ukraine, Croatia, and Bulgaria are breakeven in 2009 on Goldman's numbers. IF thse assets are wroth $1 billion, very plausible in my opinion, the multiple falls to under four times the profitable operations in the Czech Republic, Romania, Slovenia, and Slovakia.

CETV's long-term future remains extremely attractive. I believe the stock will go back to over $100 in the next several years. Obviously, given this belief I want to average down current positions. Timing of a recovery in the shares will be determined first by macro events. I'll be watching for further rebounds in emerging market currencies and narrowing of credit spreads on emerging market debt. Any ease in worries about global economic growth will also be welcome.

At the company level, we will just have to wait and see how advertising shapes up for 2009. The company has a nice cushion in its results as losses in Ukraine and Croatia are almost certain to turn to modest profits in 2009. If signals from advertisers, the company, and competitors start showing advertising budgets for 2009 in positive territory in local currency, the shares will move sharply higher.

I plan to be a buyer but as with all things in this market I am waiting for more stability in the day-to-day action.

Posted by Steve Birenberg at October 30, 2008 02:33 PM in CETV