I get a fair bit of emailed flak from investors who take exception to my view that stocks with high valuations carry above-average risks. Well, your emails have been read and duly noted. And I still maintain my view.
Central European Media Enterprises, or CME
Results for the first quarter weren't great, but I don't think they presage any ongoing fundamental problem with the business. Rather, this is simply a company where there's still some meaningful volatility on a period-to-period basis.
While reported revenue was up 35% for the first quarter, adjusting that revenue to a constant-currency, "same station" basis takes that growth down to about 20%. Because of higher expenses, Central European Media posted an operating loss for the period, a 31% drop in segment EBITDA (which isn't measured under generally accepted accounting principles), and a loss per share of $0.28. On the positive side, though, operating cash flow grew to $7.7 million for the quarter, versus $1.4 million a year ago.
As reported in U.S. dollars, all of the company's stations showed revenue growth for the first quarter, though revenues in Slovenia and the Slovak Republic were down in local currencies. Ad spending is generally looking good, and the company's stations continue to perform well with respect to audience share.
Expenses were clearly a problem in the quarter. In addition to costs from the relatively newly acquired Croatian operations, there were higher financing expenses related to its TV Nova acquisition, higher non-cash compensation charges, and lower year-over-year profits in markets such as Slovenia and the Ukraine. In the Ukraine, for instance, CME faced both high costs from moving to 24-hour-a-day programming and difficult comparisons to the year-ago period, which included two breakaway hit shows.
On a positive note, the company continues to move forward with the acquisition of Czech-based TV Nova. A $700 million offering of stock and debt raised cash to fund the purchase, and 85% of the network now belongs to CME. Although it will still take some time to close the deal, it's worth the wait: Adding TV Nova will double the company's revenue and EBITDA and make CME the dominant broadcaster in Central/Eastern Europe, because TV Nova is the most-watched network in all of Europe.
So what about the stock? In two other articles I wrote about CME, I complained about the high valuation of the shares based on present metrics. Well, that hasn't changed -- it still looks expensive on trailing numbers. But it's also still equally true that CME is an ongoing growth story, and stocks with legitimately great potential rarely trade cheap.
While I'm certainly not making any promises or guarantees, if this sell-off continues, it might just induce me to take a little position in the stock. The business may not be entirely flawless, and there are certainly meaningful risks to consider, but I really do like the idea of a dominant privately owned TV operator in some of the fastest-growing parts of Europe.
For more on CME and other TV operators:
- CME Is Living in Primetime
- Bringing Baywatch to Central Europe
- Univision Grabs the Remote
- Gravity Grounds DirectTV
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).