CTC Media: The Show Must Go On

Mar.13.08 | About: CTC Media, (CTCM)

As more of the world's population enters the technology age, the demand for digital entertainment is rising. Russia is an area that is seeing particularly rampant growth with new programing becoming available across a wide geographic region. One of the companies making this expansion possible is CTC Media (NASDAQ:CTCM). The company owns a suite of entertainment assets including television networks, individual local stations, and even a few media production companies. The company operates a profitable business and is showing very exciting signs of growth. While only the fourth largest company operating in the industry, CTC sports attractive margins and a stable market share in an increasingly competitive market.

Looking at the last year’s performance, CTC grew revenues by 27% and reported EPS of $0.86. During this time, the company acquired two Russian production companies which gives CTC ownership of the content produced by these firms. The benefit of this arrangement not only covers the control of what is being produced, but also allows the company to bypass typical royalties that would be paid if they had purchased the content from another producer. The company also spent the year acquiring new stations adding 7 new units in large Russian cities. This strengthens the company’s local presence in these regional markets.

With all these acquisitions, one might draw a conclusion that CTC is in a more risky financial state because of the prices paid for the new assets. However, the company has been very disciplined with its capital and currently has no material debt on its balance sheet. A healthy cash position makes new acquisitions possible and on March 11, the company issued an announcement that they would be buying DTV group for $395 million. DTV group owns a network and 28 stations in Russia and the acquisition helps CTC reach out to the male audience which is a benefit given the company’s traditional female viewing audience. The company is also integrating new assets in Kazakhstan and Uzbekistan which should add value to earnings in 2008.

In order to monetize any of its broadcasting assets, the company must be able to sell advertising slots. Currently, television is one of the cheapest advertising media available in Russia and at the same time, demand is outstripping supply. This phenomenon has led to the industry growing by 37% last year and expectations are for robust growth again in 2008. One of the challenges facing the industry is a new regulation passed that limits advertising time to 15% of total air time. While this decreases the number of ad slots the company can sell per station, the relative scarcity hitting the market has allowed for price increases which effectively offset the reduction in advertising inventory.

Since the company operates in Russia and the stock is traded on US exchanges, investors should pay close attention to the Russian Ruble in comparison to the US dollar. Last year the dollar was weak compared to the ruble and this aided investors in the ADR. The dollar has continued to show weakness in the early stages of 2008 but it may be nearing an inflection point as records are being broken and the public outcry becomes louder. A stabilizing dollar will not hurt operations for CTC, but it may skew returns for US investors who hold a dollar denominated asset whose income is acquired in rubles.

Overall, the company looks very attractive given its growth prospects for 2008 and the position in which it is trading. A stabilizing US market would do wonders for the stock as multiples would likely begin to expand and discount the growth potential in the stock. Risk is still high until the US averages can prove they are able to stabilize, but once the environment becomes more attractive, this is a good name to keep close tabs on.