Want to invest in the growth of central and eastern Europe (CEE)? Good luck. There are a couple of ADRs that trade on occasion, but otherwise investors who can't invest directly in these foreign markets are left with ETFs, mutual funds, and a handful of listed plays like Central European Distribution (Nasdaq:CEDC) and CTC Media (Nasdaq:CTCM).

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Scarcity doesn't automatically make a stock a good value, but with leading positions in several CEE broadcast markets, investors ought to consider Central European Media (Nasdaq:CETV). While ad spending remains challenging and cost inflation is an ongoing risk, the worst seems to be over for this often overlooked company. (For more on inflation, see The Importance Of Inflation And GDP.)

Signs of Life in the Second Quarter
Overall revenue rose 24% for the second quarter, and a more modest 7% in constant currency, as the company's core broadcast segment saw 20% revenue growth (or 4% in constant currency). The company's internal content division (Media Pro Entertainment) saw 34% revenue growth (18% in constant currency) as it delivered 684 hours of content to CME's stations. Less encouraging was the fact that CME's core countries (Czech Republic and Romania) grew 16% and 8% respectively.

While ad revenue is still depressed, CME nevertheless leveraged that higher revenue into better profits. OIBDA (akin to EBITDA) rose 36% this quarter, operating income rose 55%, and income from continuing ops reversed a year-ago loss into a slight profit. So far on a year-to-date basis, the company has positive free cash flow. (For more on free cash flow, see Free Cash Flow: Free, But Not Always Easy.)

The Worst Should Be Past
Ad revenue has been slow to recover in CME's market, as management estimates that the ad market actually contracted 3% in the second quarter. It is a definite positive for CME, then, that it can lever its market-leading positions to the extent it did. Still, with aggregate GDP growth above 2% in CME's operating regions and wages on the upswing, it is fair to assume that ad spending will recover. Coca-Cola (NYSE:KO), McDonalds (NYSE:MCD) and Anheuser-Busch Inbev (NYSE:BUD) don't just sell themselves after all.

Making matters better, the Czech parliament recently passed a law that will ban advertising on its two primary public TV stations - making the ad space on CME's leading channels like TV Nova and Nova Sport all the more valuable.

Eventually a Takeout Play?
In addition to an improving ad market, CME shares should also benefit from the possibility that Time Warner (NYSE:TWX) may make a play for the full company. Time Warner is a sizable strategic investor now and can't make a move for a little while yet, but it is not unreasonable to believe that the company could be interested in building a global platform.

Even if Time Warner isn't interested, it does not seem improbable to the think that another player like Liberty Global (Nasdaq:LBTYA), Vivendi (Nadsaq:VIVHY), Mediaset or Naspers could be. CME may not have the high-ticket Western European sports programming that leads Murdoch to covet BSkyB (Nasdaq:BSYBY) and attempt to acquire it via News Corp (NYSE:NWS), but it is a relatively rare asset in a growing region. Moreover, a larger buyer could perhaps build on what CME already is by expanding into markets like Hungary and Poland and/or re-entering former markets like Ukraine.

The Bottom Line
CME carries a whopping debt load right now, but it wasn't so long ago that most U.S. cable companies (like Comcast (Nasdaq:CMCSA) for instance) had a lot of debt and very little free cash flow as they established their place in the market. Consequently, it is certainly good reason to up the discount rate on the stock, but not necessarily a reason to avoid it entirely.

Assuming that CME can find topline growth in the high single digits to low teens and couple that with rising free cash flow generation (something that has admittedly been challenging in the company's history), this stock looks meaningfully undervalued. As a rare liquid play on the CEE market and a play on dollar depreciation, CME at least deserves a look by more aggressive investors. (For more on the dollar, see Profiting From A Weak U.S. Dollar.)

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Tickers in this Article: CETV, CTCM, TWX, LBTYA, NWS, VIVHY, BSYBY

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