Every now and then an interesting stock pops into the Magic Formula that looks like an intriguing opportunity, but just carries too much risk to recommend as a MagicDiligence Top Buy. Today I wanted to write about just such a stock that has recently entered the MFI screen. This one requires some detailed due diligence, so there is also a full stock research report available similar to the ones provided for member picks.

CTC Media (CTCM) owns and operates two free television broadcasting networks in Russia and a few surrounding, Russian-speaking countries. The CTC network is the largest, carried on nearly 400 stations and reaching close to 100 million viewers. CTC is targeted at the wide 6-54 demographic, providing entertainment programming similar to what is on U.S. networks but mostly Russian produced. CTC is the 4th largest TV network in Russia, and the largest that is 100% private owned. The top 3 are Channel One (51% owned by the state), Rossiya (100% state owned), and NTV (50% owned through a state controlled company).

CTC launched another network, Domashny, in 2005. This is a more targeted network, focused on women ages 25-60, a coveted demographic for advertisers as they control the majority of household purchases. Domashny is carried by about 250 affiliates and reaches nearly 70 million viewers. CTC Media believes that Domashny is the only network focused on the given demographic in Russia.

The main argument for this investment is the growth potential compared against the stock price. CTC Media has very favorable organic growth opportunities. Russian TV advertising spend has been growing at 40% annually over the past 6 years as the country continues it's economic development. Still, the country lags behind former Soviet-bloc countries like Poland and the Czech Republic in advertising spending per-capita. This indicates that there is still a lot of upside, and indeed CTC grew revenues over 50% in the last quarter ended September 30. Analyst expectations are for 20% annual earnings growth over the next 5 years.

This growth is protected somewhat by the fact that Russian broadcast TV providers do not face the same kinds of alternative competition that exists in Western markets - at least not yet. Cable television, broadcast TV's main rival, is mostly non-existent in Russia. While state-owned TV have some competitive advantages in the form of a larger viewership and control of political and sporting programming, all of CTC's primary competitors embrace a "channel strategy", where they own and operate the bulk of their stations. CTC utilizes an American style strategy of affiliate stations, with a few strategic channels company owned and operated. This business model is much lower cost and requires less capital expenditures.