The growth profile is enticing. The Russian TV ad market has increased at a compound annual rate (CAGR) of 14% from 2005-2011. This is expected to accelerate to 18% annually through 2013, moving Russia into the top 5 TV ad markets worldwide.
CTC has internal opportunities as well. The firm plans to buy up 40 regional stations over the next few years to increase the penetration of all three of its networks, particularly DTV, which is expected to reach 80% of households by 2016. CTC has also mentioned the possibility of expanding its broadcast footprint into additional former Soviet countries such as Belarus and Ukraine, the latter of which is a sizable market.
This is not theoretical growth. In the second quarter, CTC delivered a 28% increase in revenue, and is conservatively projecting 15% revenue growth (in rubles) for the 2010 fiscal year. This looks poised to continue for many years to come.
Let's talk risks
. First, there is Russia. Powerful governments like to control mass media, the currency is inflationary, the banking system is questionable and largely unregulated, political risk is high and the country has little history of private free enterprise. We could go on, but in a nutshell, this is an unpredictable environment in which to do business.
More specifically, CTC is facing some headwinds to grow its audience share, which is a major part of advertising pricing. CTC has seen marked declines this year, from a historical share around 12% down to 11% so far. Domashny and DTV have experienced more modest declines. This weakness caused CTC to cut its guidance from 20% revenue growth down to 15% in September.
Pay TV is an emerging risk. While cable and satellite are underdeveloped in Russia, they are coming on strong: non free-to-air viewership increased from 9.5% to 11.9% in the first half of this year. CTC also faces strong competition from Russia's top 3 networks: Channel One, Rossiya and NTV. The first two are largely state-owned and get beneficial programming, such as news and high-profile sporting events that CTC lacks.
All told, CTC Media is a very attractive, growth-at-a-bargain-price investment that more than adequately prices in the risks at current valuations. My risk-adjusted fair value is $18, and the stock has shown the ability to trade even higher. With nearly 100% potential upside, this is one "un-official" Magic Formula stock investors might want to consider.
It's "un-official" because today we've gone off the beaten path a bit. MagicDiligence's main mission is researching, writing about and recommending stocks off of Joel Greenblatt's "official"
Magic Formula Investing screen
. However, we've recently seen changes to this official screen that have removed pretty much all firms that are domiciled in foreign countries, regardless of how they are listed on U.S. exchanges. While this is good in many cases (removing Chinese reverse take-overs, for example), it is also hiding some attractive international stocks that have non-ADR listings on American stock exchanges.
This is one thing that
MagicDiligence's own MFI screener
) avoids. While it too throws out ADRs (because financial numbers are not reported consistently), natively listed foreign stocks that file "normal" 10-Ks and 10-Qs are included. This opens our eyes to some attractive overseas stocks we would not otherwise be exposed to.
One such situation is Russian broadcast network CTC Media, which currently screens as No. 41 on my top 50 over 50 million screen.