Russia has certainly been busy over the past few months.
Perhaps not willing to relinquish the spotlight after the Sochi Winter Olympics, Russia's leader Vladimir Putin has moved decisively into geopolitical conflicts in the Ukraine, most recently announcing the annexation of Crimea, drawing rebukes and sanctions from both the U.S. and European Union.
The resulting conflict and uncertainty has driven several Russian-based stocks down near or below their 52-week lows, and I've seen several articles published recently, highlighting potentially attractive Russian stocks.
Today, MagicDiligence wants to throw its hat into the ring, reviewing a Russian-based company that has long been a member of our screens. This stock has a nice profile: stable, conservatively run, above average growth, no debt, and a safe dividend yield of almost 7.5%. Let's check it out.
CTC Media - The CBS of Russia
The stock of interest is CTC Media (CTCM). The easiest way to think of CTC is as "the CBS of Russia". The company runs 3 over-the-air television networks in Russia:
CTC is the 4th largest television network in Russia, and 3rd in its key 10-45 age demographic, with an 11% audience share and reaching over 95% of the population. CTC focuses on family-based entertainment programing. It is by far CTC Media's most important channel, driving 72% of revenues in 2013.
Domashny is CTC's second channel, focusing on 25-59 year old female viewers (an important advertising demographic) with woman's lifestyle programming. Domashny's audience share was about 3.6% in 2013, and reached just over 90% of the population. Domashny accounts for 14% of sales.
Peretz is the third channel, targeting 25-49 year old viewers and designing programming around "edgy, thrilling and action" content. Peretz has a 2.7% share with a 86% audience reach, and generates about 10% of sales.
Additionally, CTC operates Channel 31 in Kazakhstan. Channel 31 is a general entertainment channel with substantial share (over 13%, third-most viewed channel) in that country. Channel 31 accounts for 3% of revenues.
CTC is an "old-school" media company, relying on over-the-air advertising spots for 97% of revenues. It doesn't get much more straight-forward than that!
The Russian Advertising Market Continues to Grow
CTC has generated a 5-year compound annual revenue growth (CAGR) rate of almost 11%, and growth potential remains. The Russian TV advertising market is expected to grow at 5-8% annual rates for the next several years, at least. CTC has already secured about 85% of its 2014 ad space inventory at rates above 2013, so this year is already looking pretty good - Crimea or no Crimea.
Over the long term, CTC has plenty of options for growth in addition to market expansion. The firm has a history of acquiring new channels - both Peretz and Channel 31 were purchased in 2008. A new channel, CTC Love, was launched in 2013. International syndication of CTC's programs and digital media entertainment assets are auxiliary opportunities.
Conservative and Well-Run
A lot of American media companies would blush at CTC's financial metrics. A media company with no debt? Unheard of in the U.S., but CTC carries zero long-term debt and over $210 million in cash on the balance sheet.
Additionally, CTC generates a lot of free cash flow - consistently over 20% of revenues, and over $180 million in 2013 alone. The company has been generous returning this to shareholders, paying out just over 50% of it in dividends. CTC's announced $0.70 dividend for 2014 (an 11% increase over 2013) amounts to a 7.4% yield at current share prices. CTC even bought back stock for the first time last year, a modest $30 million in repurchases, but as the stock price comes down, we could see more activity here.
Even though this is considered a "risky" Russian stock, management has shown themselves to be conservative and shareholder friendly in their stewardship of the company.
The Risks - Mundane and Otherwise
In truth, the main risks to CTC Media are not geopolitical headline fodder like government repossession or the return of communism, but more mundane risks.
The most acute risk is one faced by all over-the-air broadcasters - the rise of pay TV and alternative entertainment. Domashny, Peretz, and particularly Channel 31 all lost audience share in 2013. According to CTC, non-free-to-air broadcasting increased to 18.6% of viewership in 2013, from 16.2% the year before. This will only increase moving forward.
Of course, Russia being what it is and having the history it does, political and economic stability are risks to consider. Even if there is no real acute risk to the company (as in the current Ukraine situation), if the market perceives it as a risk, the stock WILL be sold down. CTCM has been and will likely continue to be a volatile, wild ride for shareholders.
CTC's days of 20%+ growth are behind it, but given the underlying growth in Russia's advertising market, and CTC network's proven ability to attract and hold viewers, I see continued growth in the 3-4% range. Along with an appropriately high discount rate and earnings yield valuation multiple (both 12% to account for risk), my target price for the stock is $13.50 per share.