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August 02, 2007
Ukraine Shortfall Pressures CETV Despite Otherwise Great Results
Central European Media Enterprises (CETV) reported second quarter revenues and EBITDA above estimates. However, the composition of the results caused concern among investors leading to a sharp 5.4% decline in the stock on above average volume. I think investors overreacted and remain very bullish on CETV shares. I was adding to positions in some client and personal accounts into the weakness.
CETV report a 38% increase in revenues and EBITDA, both comfortably ahead of my estimates. Second quarter results represented an acceleration form the first quarter when revenues and EBITDA grew 21%. The Czech Republic, Slovakia, Romania, Slovenia, and Ukraine all matched or exceeded estimates. However, Ukraine had a very poor quarter due to political turmoil and weak ratings. First quarter results in Ukraine were also poor.
As a result of the weak first half in Ukraine, continued low visibility with elections coming up on September 30, and uncertainty on ratings in the fall TV season, management dropped the bottom end of its guidance range for revenue and EBITDA. I believe this is the reason for the negative reaction of the shares. Getting less notice was the fact that management did not adjust the upper end of guidance. In other words, management feels that it is possible to make up the shortfall in Ukraine in the other five countries. Given the momentum in those countries revealed in their exceptional second quarter results, I am extremely confident that full year results for all of CETV will be in the upper half of guidance. The bottom line is that despite assuming Ukraine moves from 12% of 2006 EBITDA to a small loss in 2007, CETV will still make at least what I expected prior to the second quarter report.
I still expect CETV to report 30% growth in revenues and EBITDA in 2007 excluding a $10 million investment in developing the company's internet properties. Excluding Ukraine, I expect revenue growth of 35% and EBITDA growth of 55%. High growth should continue in 2008 where I am looking for 18% and 25% growth in revenue and EBITDA excluding Ukraine. Should the September elections lead to a stable government, CETV's results in Ukraine in 2008 are likely to bounce back with revenue growing more than 30% and a return to EBITDA profits even assuming no rebound in ratings. History would suggest that ratings improvement would occur....
CETV is trading at 11 times my estimate of 2008 EBITDA assuming breakeven results in Ukraine and Croatia. Those two markets will have 2008 revenue north of $150 million combined. Ukraine had $21 million in EBITDA in 2005 and $30 million in 2006 while 2008 will represent breakeven for Croatia after several years of significant investment. The 11 EBITDA multiple implies that there is no value to Ukraine or Croatia which is absurd. I am certain that if CETV held an auction for its stations in those two countries, bids would more than $500 million which equals $12 per CETV shares.
Yesterday's stock price decline and the uncertain outlook in Ukraine creates more risk in achieving my $130 target for CETV shares in 2008. However, my experience with this company and its management team since 2001 leaves me confident that the stock will achieve my expectations.
Posted by Steve Birenberg at August 2, 2007 04:32 PM in CETV
THE MARKET PSYCHOLOGY APPEARS TO BE TOTALLY CHANGED .EVEN GOOD NEWS IS BEING TREATED AS BAD NEWS AND THE MARKET CONTINUES TO DROP.AT WHAT POINT WOULD YOU FEEL WE ARE BACK IN A SECULAR BEAR MARKET AND WOULD YOU SELL A LARGE PORTION OF THE HIGH BETA-STOCKS?
Posted by: MP at August 3, 2007 09:44 AMIt is not my style to sell stocks based on the market environment. I sell in two circumstances. First, I trim positions that I won on strength. Having cut back on stocks like CETV and AAPL as they appreciated to keep clients from becoming hugely overweighted in high beta stocks, I reduced the risk of just such a shift as you identified. Second, I sell stocks if I no longer believe in the long-term growth rate and the ability of that growth to ultimately drives the shares significantly higher. Presently, I am still a firm believer in CETV as the post above indicates.
I do believe the market action in the last few weeks marks the end of the uptrend we have enjoyed for several years. I am not yet of the belief that we are entering a secular bear market. I think it is quite possible that the "credit crunch" will not have significant impacts on broader economic growth and corporate profits. I am especially hopeful that the financial strength of US companies as reflected in balance sheets low on debt and high on cash will provide a cushion.
I could be wrong. The way to protect yourself against devastating declines that occur in high beta stocks is to now concentrate too many of your investments in high betat stocks.
Posted by: Steve at August 3, 2007 09:58 AMIT SEEMS AS IF THE PRESENT SUMMER SWOON ,ALTHOUGH DUE TO A CREDIT CRUNCH THAT IS AS MUCH PERCEIVED AS IT IS REAL,IS CAUSING TREMENDOUS DAMAGE TO THE MARKET.SOME SYMBOLIC ACTION MUST BE TAKEN BY THE GOVERNMENT TO RELIEVE THE PRESSURE IN THIS REGARD.
IS THERE ANY CHANCE THAT THE FED WILL LOWER INTEREST RATES THIS WEEK IN AN ATTEMPT TO COMFORT THE MARKET.
I would be very surprised if the Fed lowered rates this week. However, I do not think the market expects a rate decrease. I do think that a comment by the Fed within their statement that they are cognizant of the credit crunch and see it as a risk equally important to inflation is necessary. If the Fed brushes off the credit issues, the market will take it badly. An acknowledgment of the issue should lead to a rally even without a rate cut.
Posted by: at August 6, 2007 07:58 AMThe overall market is up nearly 300,but CETV is down $1.Has the market just rotated away fron the emerging markets and from growth stocks?How long will this rotation last?
Posted by: mp at August 6, 2007 03:26 PMI'm not sure why CETV did not participate inthe rally today. The stock has often gone its own way. I would hope that if the market holds in on Tuesday that CETV would regain some ground vs. the market. I do think that investors are rotating from assets perceived as risky. Note how despite the huge gains in the Dow and S&P 500 the Russell 2000 small cap index was up almost 1% less. CETV will go back up eventually as long as the growth continues -- I think ti will.
Posted by: Steve at August 6, 2007 09:09 PM