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Mid Cap and Value Still Reign

For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.

The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.

There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.

The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.

In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.

The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.

Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.

Mid Cap and Value Still Reign

For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.

The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.

There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.

The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.

In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.

The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.

Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.

Mid Cap and Value Still Reign

For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.

The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.

There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.

The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.

In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.

The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.

Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.

Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media

Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).

The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.

Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.

Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.

Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.

This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.

The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.

Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.

Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media

Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).

The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.

Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.

Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.

Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.

This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.

The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.

Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.

Normalcy Accompanies Growth and American Apparel Bounces Back

One of Northlake's biggest portfolio headaches is a lot better today. Pain relief came in the form of very solid quarter from American Apparel (APP). 2Q results were inline to a bit better than the few analyst estimates. Revenues of $133 million exceeded the estimate of $126 million. EPS of 10 cents matched estimates despite much higher expenses to beef up corporate support and dramatically increase manufacturing personnel in support of rapid overall and same store sales growth. Guidance was confidently affirmed. Given the history of controversy surrounding the CEO and accounting and reporting issues, the 2Q results should come as a great relief to investors and leave shorts scrambling.

Leaving aside the controversies, APP is executing quite well in its growth initiatives. Revenues rose 39% with retail only sales up 51%. Gross margins expanded by 300 basis points. Operating income grew 29% despite the aforementioned expense ramp. Net income rose 42% thanks to lower interest rates and some debt reduction. Same stores sales for 2Q were up 23% and are on track to exceed full year guidance of 15% even with a 40% comp coming up in 4Q.

Given this growth profile the shares are cheap at less than 20 times 2008 estimates and just 12 times 2009 estimates. Growth in 2009 will be driven by aggressive new store growth, high single digit to low double digit comps and leverage of operating expenses that are finally reaching the point at which a public company should operate. On the call, management indicated that over the next few years operating margins could expand by 600-800 basis points.

Were it not for the controversy surrounding CEO Dov Charney....

....APP would be the hot teen retailing stock of the moment. It is understandable why many investors will never invest with Charney. However, I challenge anyone interested in growth retailing to listen to the Q&A on the conference call and come away without thinking that Charney is a thoughtful, creative, and decisive retailer. He may be an asshole to some folks but the guy can do retail.

If 2H08 results support current 2009 estimates, a permanent CFO is hired, and Sarbox compliance is achieved, APP shares are headed to at least $10, possibly the teens. I think those things will happen and the upside is worth the risk of dealing with Charney's chaotic and controversial personality and management style. This quarter was going to be the one that made me either throw in the towel and take the losses or build confidence and convince me to hold on. I am not sure yet if I will average down but I am definitely planning holding onto client positions.

Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

August 2008 Model Signals

Once again there were no changes to Northlake's monthly Market Cap and Style models. The Market Cap signal remains mid cap and the Style signal remains growth. As a result, Northlake continues to own the S&P 400 (MDY) and the Russell 1000 Growth (IWF) for assets devoted to this strategy.

The Market Cap model remains a split decision with half the indicators favoring small caps and half favoring large caps. The resulting signal is mid cap. The indicators did move significantly in favor of small caps for August. In fact the unsmoothed signal month reading is just barely in small cap territory. The two month average remains in mid cap but leaning toward small cap. The only indicators to shift this month were the technical trend measures.

The Style model remains firmly in growth territory as it has been for over one year. The growth signal has weakened form earlier this year due to the steepening of the yield curve and the valuation measure which is reflecting the massive underperformance of value during the last twelve months.

Last month the mid cap and growth signals were inaccurate....

....Both large caps, as measured by the S&P 500, and small caps, as measured by the Russell 2000, produced a return great than MDY. Mid cap indices have been big beneficiaries of their relatively greater exposure to the energy and basic materials boom and relatively lesser exposure to financials. In July, those sectors pulled back sharply and financials rallied. Growth lagged last month as well as financial heavy value indices got a boost from the sharp bounce in that sector and technology stocks lagged.

Big Media Fundamentals Holding Up For Now

Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica's estimates weren't far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.

In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a "head fake" as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.

I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.

With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel....

....Jessica's report of March 14th had the first commentary that suggested TV advertising might be slowing. She mentioned that News Corp said that Fox TV stations are running about 5% under budget and that CBS mentioned slower advertising growth in some smaller markets. Both companies mentioned strength elsewhere that would at least offset the weaker TV ad trends but this is definitely something to watch.

The bottom line is that if TV ad trends (and travel trends for DIS) do not slow markedly over the next quarter or two the shares of the major entertainment companies are deeply undervalued. Another question is whether current prices reflect enough of a slowdown to insulate stock prices against lower estimates. I am not sure how this plays out but I think in the case of NWS and DIS downside is about 10% while upside is 20%. That is a risk-reward tradeoff that encourages me to maintain my positions in both stocks.