CETV Will Turn Weaknesses to Strengths

Central European Media Enterprises (CETV - commentary - Cramer's Take) presented Monday morning at the 36th annual UBS Media and Telecom Conference in New York City. The presentation appears to have helped, as the shares rose 20% 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.

The recent strength was challenged yesterday when Merrill Lynch downgraded CETV shares to "underperform" from "buy" as part of re-rating of all the Central and Eastern European broadcasters it follows. Merrill's analyst, Mariya Rubanovskaya, appears to be discounting the comments offered by CETV at UBS -- her estimates are much more conservative than those comments would suggest are necessary.

CEO Michael Garin led the presentation, which I listened to via 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 Garin 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 the company is making no forecasts, but don't assume that means CETV will 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.

Garin also reiterated that the company's advertisers are in the brand-building business for consumer staples, creating a more stable ad market than most investors assume. He also restated plans to dramatically cut capital spending, limit investment in developing markets (Ukraine, Bulgaria, Croatia) and reduce corporate overhead (20% of London headquarters staff has already been laid off).

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At time of publication, Birenberg was long CETV in personal and client accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.