Russian stocks have taken a pounding in light of economic sanctions and tumbling energy prices. Over the past two years, the Russian stock market Market Vectors Russia ETF (RSX) is down nearly 20%, compared to a near 30% rise for the S&P 500.
While the overall Russian indexes have bounced back recently, many small-cap stocks have been left behind in the rally. One such stock, CTC Media (CTCM), followed the aggregate Russia markets fairly well until the rebound. Were CTCM shares left behind by accident, representing an opportunistic value?
The business
CTC Media is one of the largest broadcasters in Russia, with roughly 15% of its target market. The company is an integrated broadcaster, meaning that they operate domestically and internationally, operate pay stations and free-to-air channels, as well as control their ad sales.
The only company with a larger audience share in Russia is the Gazprom conglomerate.
Additionally, the company has been capitalizing on the significant portions of Russia speaking populations abroad. They have launched multiple international versions of their channels and have ample room to grow in highly populated, underpenetrated countries.
History
Management
While most of the management team has significant industry experience, many are fairly new to the company.
Ownership
Much of the shares are owned by investment/holding corporations. Only 36% of the shares are owned by the public, limiting individual shareholder rights. Both of the larger shareholders, however, (Modern Times Group and Telcrest Investments) have previous media experience and may help gain momentum on any shareholder proposals.
As with many underfollowed companies, short interest is fairly low.
Institutional ownership is also quite low. Peter Lynch preferred to buy companies with low institutional ownership as it allows for more opportunities for mispricing.
Notably, however, management owns very little of the company. This may have to do with their short tenures however rather then a specific call on the company’s future.
Growth opportunities
Fortunately, the fragmentation of the Russian TV market presents opportunity for niche channels to grow. CTC’s channels are primarily located in the non-FTA/regional/second tier bands. These segments have been growing in audience share at the expense of state-owned channels.
Overall TV audience, meanwhile, has been growing steadily since 2006, despite the introduction of alternative forms of entertainment.
Valuation
While earnings have always been choppy, both revenues and net income are up steadily since 2002.
The collapse in share price, meanwhile, has more to do with the valuation multiple than the health of the business. Despite growing the top and bottom lines, the company’s price-to-sales and price-to-book ratios have plummeted dramatically in the wake of macro issues.
This has caused the shares to price in only minimal growth over the next few years. If the macro pressures pass, EPS is expected to almost double from 2015 to 2016.
Using GuruFocus’ Reverse DCF Tool, we can estimate that investors are only pricing in less than 5% annual EPS growth at current levels. This is far below the company’s 10-year historical rate of 10.2%.
Even if the firm only grows at 5% a year, using next year’s EPS estimates causes the shares to be 40% undervalued.
Conclusion
While it’s difficult to predict macro issues, it looks like shares of CTCM got lost in the shuffle after the recent Russian market rebound. At current prices, it looks like there is still significant margin of safety should pressures outside the company’s control persist for longer than anticipated.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
