CTC Media Has Growth, Value, and Yield
Today we're going to go 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 (MFI) 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 (for members) 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 I want to discuss in this article is Russian broadcast network CTC Media (CTCM), which currently screens as #41 on my top 50 over 50 million screen.
The easiest way to think about CTC is as "the Russian CBS (CBS)". CTC operates 3 networks. CTC is the largest, currently the #4 TV station in Russia, reaching 94% of Russian households and carrying a 11% audience share in its target 6-54 demographic. Domashny, launched in 2005, is a network targeted at 25-60 year old female viewers (a desirable advertising demographic), reaching 82% of households with a 3% share. Finally there is DTV, acquired in 2008 and targeted at 25-54 year old viewers, reaching 73% of households and holding a 2% audience share. CTC also has a number of other businesses, including smaller networks in Kazakhstan and Moldova, a Youtube clone called Videomore.ru, content production studios, and a number of company-owned regional stations. The majority of broadcast stations are independently owned and operated affiliates. Virtually all of the company's revenue is from traditional, free over-the-air advertising.
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 3 of their networks, particularly DTV which is expected to reach 80% of households by 2016. CTC has also mentioned the possibility of expanding their 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 Q2, CTC delivered a 28% increase in revenues, and is conservatively projecting 15% revenue growth (in rubles) for the 2010 fiscal year. This looks poised to continue for many years to come.
While many understandably flinch at the idea of investing in such a volatile country as Russia, CTC Media looks like a well-run, conservative outfit. The firm is debt-free (pretty remarkable for a media company) and has nearly $130 million in cash on the balance sheet. Operating margins and cash flow generation have been steady over the past 5 years, even in the 2008-09 period. Share dilution has been minimal.
Of particular interest is the firm's recent payment of dividends. While there seems to be no consistent policy (it has been quarter-to-quarter), there have now been 6 consecutive quarterly dividends. The stated dividend intention of $130 million for 2010 represents a roughly 8.7% yield on the current market cap of $1.5 billion.
That's a significant payout on top of what is also a value story. CTC's MFI earnings yield is 17% (P/E ratio is 9.1), extremely low for a 20% grower in a long-tail growth market. The stock's current price of $9.50 or so is right near the 52-week low. By comparison, the 52-week high is $25 - a 178% gap! At current valuations, CTC seems to have a lot of upside with limited downside and a large dividend yield for protection.
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 their 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 this year. Domashny and DTV have experienced more modest declines. This weakness caused CTC to cut their 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.
Steve owns no position in any stocks discussed in this article.