Archive for category: CETV

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.

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.

Central European Media Enterprises (CETV) presented on Monday morning at the 36th Annual UBS Media and Telecom Conference in New York City. The presentation appears to be contributing to a rebound in the shares which are up 13% today to their highest price since mid-November. Also contributing to the rally has been modest strength in the Euro and other Central European currencies and the strong rebound in the market.
CEO Michael Garin led the presentation which I listened to via a webcast. It sounded like a small crowd, not too surprising since CETV presented opposite Comcast. Garin did a quick overview of the presentation the company has recently been using. His remarks were a bit more off the cuff than other recent presentations I have listened to.
The most important takeaways were: (1) 65% of advertisers have committed their 2009 budgets in the Czech Republic, Romania, and Slovakia giving him confidence to state that in these three markets, which generated 120% of 2008 operating profit, the company would enjoy a “significant double digit” gain in local currency advertising revenues in 2009, (2) Ukraine has no visibility and they are making no forecasts but don’t assume that means they are going to lose money in Ukraine in 2009, (3) the company has three budgets – moderate growth, recession, and depression – under which it would show EBITDA growth in local currency. The depression budget has local currency growth despite an $80 million, or 8%, hit to revenue, a scenario that the company believes is extremely unlikely….

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This excerpt from the Wall Street Journal is interesting as it pertains to CETV:

“But it’s not just tough conditions that explain the slack sales of L’Oreal’s cosmetics and its profit warning. That performance contrasts with robust sales and outlooks at Colgate-Palmolive and Unilever, more diverse rivals selling cheaper personal-care products.
L’Oreal may have simply misread the market and let its advertising and promotion budgets slip, just when they needed a boost to win over pinched consumers. The company didn’t give third-quarter figures, but A&P spending in the first half eased to 29.7% of revenue from 30.5% a year earlier.
L’Oreal has promised a burst of A&P spending to support what remain popular brands, but acknowledges that this will hurt margins.”

L’Oreal was one of the advertisers listed in CETV’s analyst day presentation along with P&G, Unilever and other major consumer packaged goods companies.
I suspect investors won’t believe in local currency ad growth in 2009 in emerging markets until they actually see it but this a good reminder that big picture fundamentals support the possibility.

I am heading to NY Thursday morning to attend CETV’s annual analyst meeting which convenes at noon. CETV has long been my favorite stock (since 2001) offering a combination of growth, value, and superb management. However, over the last four months the stock has been an absolute disaster. First, investors lost confidence in advertising growth rates causing multiple contraction. Second, the dollar rallied leading to estimate issues in US dollars. Third, Russia invaded Georgia. Fourth, emerging markets stocks succumbed to the credit crisis. Fifth, and most worrisome, this week, emerging markets economies and currencies began/accelerated a downward spiral.
I have missed the sentiment shift and the risk of deteriorating fundamentals. I also did not anticipate how easily the credit crisis would spill over to emerging markets currencies and economies. I thought that emerging markets economies, which undeniably were in good shape, and not overleveraged would be able to hold up reasonably well. Yesterday, the market voted no. Now we will see if the reality gets as bad as the markets are assuming.
Against this backdrop, CETV will put up a brave front and strong defense….

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