About the company
CTC Media, Inc. (NASDAQ:CTCM) is a media company which operates three Russian television networks: CTC, its flagship network, Domashny, and DTV. CTC network offers entertainment programming targeted at 10-54 years-old viewers. Currently, the company covers approximately 100 million people with all of its channels.
Introductory facts: What you need to know about the company.
There is a strong competition among the Russian channels for audience and ratings, which directly impacts the revenue stream of the company (poor ratings = less money received from the sale of ads). Audience shares and ratings, in turn, depend largely upon the appeal of the company's programming.
- Substantially all of its revenue is generated from the sale of television advertising.
- Market share: approximately 17% of Russian market.
- CTC is the third most-watched channel in Russia among 10-45 years-old viewers.
- Last year approximately 300 advertisers purchased national advertising on CTC.
- The top ten advertisers, in the aggregate, represented approximately 34% of the company's total advertising revenues.
Valuating the company
Through my own analysis, I will explain to you why the company is undervalued and has a high upside potential.
The company has grown during the last couples of years. The operating revenue has increased at a 10.4% compounded rate over the last 5 years, whereas the net income has increased at an 8.4% compounded rate over the same time frame.
It is important to mention that the growth rate has been calculated in USD dollars; if using the Russian Ruble such growth would be greater. The main reason is due to the depreciation of Russian Ruble against the dollar, which means that now is worth less when compared to the American currency (more will be mentioned in the risk section).
Source: 2013 Annual report.
The company's stock is selling at 6 times its current earnings, which represents a low multiple considering the industry average of 25 times earnings.
At the current price (approximately $6 USD a share) the investors are paying 1.2 times the amount for the entire business (book-value is worth 743 million). The company is free from long-term debt with only 3 million dollars in short-term loans. The investors are getting the whole business at a considerably fair price (using the value approach).
Also, we must keep in mind the high net margin of the business (18.7%) which happens to be the double of the industry's average (9.3%).
What makes CTCM Media a good investment?
There are some key facts that help me to distinguish between a good business from a bad one.
The company currently generates $180 million ($1.12 USD per share) of free cash flow. CTCM Media has an impeccable record without losing any money in any single year, this means that it has generated positive cash flow over the last 10 years. Meanwhile, the book value per share has remained stable.
In addition, the company has not issued any shares in the last 7 years.
The dividend: The company has increased its dividend in the past few years. As of present, it represents an outstanding 11% yield.
On March 5, 2014, the Board declared a dividend of $0.175 per outstanding share of common stock. Currently the company intends to pay further dividends each of the following quarters in 2014, amounting to a total of $.70 per share for the full year of 2014. Since the company generates all of its revenue in Rubles, a favorable movement against the dollar could positively impact the amount paid allowing the management to boost the dividend.
The company is reaching more people
As stated in the 2013 Annual report, CTC Media has increased its technical penetration from 90% in 2009 to 95% in 2013. This means that now the current channels are able to reach 95% of the total Russian population.
Analyzing the company segments we can see how the company has turned an unprofitable segment, losing 96 Million dollars in 2011 to a profitable one, making more than 6 million dollars in 2013.
Source: 2013 Annual report.
Wise use of money
The company generated almost 10% of its 2013 income from interest (fixed interest generated by short-term investments). This money provides the company with the ability to meet part of its dividend requirements.
Source: 2013 Annual report.
One last fact
Since the major assets of the company are "T.V. rights", the management can lower the investment on fixed assets such building and equipment, which in turn, gives more flexibility to the company (the money can be invested in new opportunities).
Risks: Why are investors overlooking the opportunity?
There are a couple of risks we need to consider before estimating the size of the investment opportunity.
The main competitors are state-owned companies, which can mean that at some point the government may have the ability to modify the "rules" favoring its owned companies.
If the company wants to expand (acquire more companies), it would take it as long as 6 months to receive the approval from the government. There is also a restriction over the foreign ownership, which limits the company's stake over others (since its publicly traded in a U.S. market and only a small portion of the investors are born in Russia).
There is an excellent article written by another Seeking Alpha contributor about this issue (read more here).
Total television advertising spending in Russia has been adversely affected by recent economic instability. As you may already know, in the last few weeks, we have heard about the sanctions that the U.S. and the European Union have imposed on Russia. Those sanctions could trigger a slowdown in the Russian economy affecting the company's revenue stream.
As mentioned earlier in this article, the fact that the company generates most of its revenue in Russian Rubles exposes the company to the volatility of the currency market.
Bull case: The Ruble gains territory against the U.S. dollar, in consequence the revenue "apparently" increases and gives the company the ability to boost the dividend.
Bear case: The opposite can happen as well, making it more difficult for the company to sustain the dividend at the current amount.
Time to buy?
The company buying back shares
The company has started to buy back some shares. In 2013, the company repurchased 2,500,000 shares of their common stock in the market at an average price of $11.89 per share for a total of $29.7 million. I believe this program will benefit the shareholders by increasing the perceived "earnings per share".
2013 Equity Incentive Plan
On the 2013 Annual report, the company announced an "Equity Incentive Plan" which consists in stock options for some key executives.
However, want to know an interesting fact about the management's stock options? The execution of those options is subject to one condition: the closing price of the common stock has to exceed $12.00 per share on at least ten trading days prior to exercise. This means that under the current conditions (current stock price $6 USD), the stock has to appreciate almost 100% in order to execute their stock options.
(Read more in the Annual report here.)
In my opinion, we must conclude something: the management must deliver good results (which will boost the price) before taking any compensation.
Over the last couple of years the stock has been traded above the S&P 500 average. However, since the fears of a slowdown in the Russian economy began, the investors started to liquidate their positions sending the stock to a lower multiple.
It is fair to say that after the issues concerning Russia cease, the investors will be back.
Timeframe and size of the opportunity
In my opinion, I would recommend to purchase this stock for those of you who can invest your money in a long time frame. In the meantime, you will be receiving an 11% return (or more if the company increases the dividend).
I believe that the stock has a good opportunity to double its value in a long term horizon.
- The management cannot exercise their options unless the stock doubles its current value.
- The company does not have a single year with losses (not even during the past recession).
- Although the past is not a picture of the future, the company might keep its current growth.
- With less shares in the market the earnings per share will increase.
- In my experience, good management always overcomes the most difficult scenarios. This is a well-managed company, it is time to take advantage of the cheap price.
The opportunity is clear,at the moment everyone is fearing for the future of Russia. For those who focus on the long term, right now is the best time to acquire a safe high yielding company.
I would like to quote the investor that I admire the most:
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
I hope you have enjoyed my article, I would be more than happy to answer any questions you may have.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.