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by David Sterman

It's been 22 years since the Berlin Wall came down. Since then, economies behind the Iron Curtain have been slowly building a head of steam. Even though countries such as the Czech Republic, Romania and Croatia have not yet caught up to their Western neighbors in terms of GDP, they are now blessed with far better infrastructures and their citizens currently have rising levels of disposable income. As these trends continue, Eastern Europe could possibly become one of the most important investing regions in the years to come.

My favorite regional play for this possibility is Central European Media (Nasdaq: CETV), which has spent the past decade acquiring leading TV stations in a host of major cities, from Prague to Bucharest. Despite its appealing business model, shares always seemed a bit rich, briefly moving past the $100 mark in 2007. Not anymore. In the past three years, shares have lost 80% of their value and can finally be considered a bargain. And a clear set of catalysts exist to help shares regain their luster. A return to $100 a share is likely out of the question, but patient investors may be looking at a stock that can double in the next three to four years.

Pain now, gain later
Cobbling together a region-wide set of TV stations hasn't come cheap: Central European Media has amassed more than $1 billion in debt and investors have grown concerned that the business isn't generating enough cash to justify all of the loans. Yet during the next three or four quarters, that concern is likely to be laid to rest.

First off, that's because many of the TV stations that CETV acquired needed significant investments to bring them up to world-class standards. That was no problem in 2005, 2006 and 2007 when the local economies were faring quite well, leading to rising TV viewership and fast-rising ad rates. But the economic slowdown really took a toll and ad revenue fell sharply in 2009 and yet further in the first half of 2010. They're on the rebound now and all signs point to the beginning of an economic -- and advertising -- upturn in 2011.

That expected upturn coincides with the end of a period of heavy investment, so cash flow growth is expected to be especially robust in 2011. Analysts at Janco Partners predict sales will rise 9% in 2011 to $783 million, yet EBITDA may rise 40% to around $190 million.

Those projected increases are partially attributable to a slight shift in the company's business model. The 2009 acquisition of Media Pro Entertainment, which specializes in the development of new TV programming, has the potential to yield new revenue streams. Central European Media hopes to re-package and translate the Media Pro's content to run on all of its major stations. Presumably, a popular soap opera in the Czech Republic will hold similar appeal in Bulgaria or Croatia. Results in 2010 have been negatively affected by the spending associated with this move, but the Media Pro division is likely to become a cash generator in 2011.

Of course, the lion's share of revenue will still come from advertising, and all signs point to growth. In the past decade, many Western European nations have been opening up manufacturing plants in countries like the Czech Republic and Slovakia. As workers in those nations start to generate higher wages (relative to the paltry wages they used to earn), advertisers will start to take note. Ad rates surged in the middle of the 2000s, but fell sharply in the recent economic slowdown. More specifically, ad spending tends to grow or shrink at twice the rate of a region's GDP growth, so moderate economic growth in Eastern Europe in coming years should yield more impressive advertising growth rates.

2011 will be a transition year for Central European Media. Cash flow is expected to rise sharply on the heels of decent sales growth. But the company won't likely see GAAP profits until 2012. Look for investors to start focusing on that 2012 profit swing in the coming months. The upcoming fourth-quarter (2010) conference call is likely to detail the company's improving metrics. That should be the catalyst needed to get this flagging stock moving back in the right direction.

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

Source: Central European Media: Bargain Stock in an Overlooked Region