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As a frequent flyer, I view the downing of Malaysian Airlines Flight 17 over Ukraine with more contempt than most. Being a passenger on a doomed jet might not be my worst nightmare, but it ranks near the top.
What occurred on July 17 was an appalling tragedy, which is to understate the obvious. Emotions have been running feverishly ever since. The United States, Ukraine, and the European Union are eager to apportion blame, and they all want to apportion it to the Russian government, which is just as eager to deflect it.
Blame and finger-pointing is nothing new. U.S. and Russian government relations have grown increasingly frigid over the past year: The U.S. government wants the Russian government to butt out of Ukraine’s affairs, namely the Crimean separatist movement; the Russian government wants the U.S government to butt out of Russia’s affairs.
The U.S. government has responded with an array of economic sanctions. First, it sanctioned 11 Russian and Ukraine officials this past spring. U.S. companies with a Russia or Ukraine presence are generally prohibited from interacting with businesses that involve or are related to those sanctioned.
In the past two weeks, President Obama expanded sanctions, most notably targeting two Russian banks, Gazprombank and VEB; and two energy companies, Novatek and Rosneft. In effect, they’ve been cut off from access to important financing in the United States.
Investors are rightly nervous. The Dow Jones Russia Total Stock Market Index is down 8% year to date. But I see upside to this down-trending stock market. I’m finding more value and high-yield in Russia than I’m finding in most markets.
CTC Media (NASDAQ: CTCM) is one of the better values. It’s the second-largest free-to-air broadcaster in Russia. Television viewership is growing at a faster rate in Russia than in the United States. The same is true of television advertising spending, which grows in the mid-to-high single-digit rates annually. CTC’s annual revenue grows at a similar rate.
Thanks to the recent sell-off in Russian stocks, CTC trades at only 11 times the 2014 EPS estimate of $0.86. CTC’s lower share price has, in turn, pushed its yield up to 7%.
Given the universal appeal of energy, deep value is difficult to find. Actually, it’s not so difficult if you look to Russia.
Integrated energy giant OAO Gazprom (OTC: OGZPY) generates $159 billion in annual revenue producing, processing, and transporting natural gas and oil. Gazprom supplies the European Union with a large percentage of its oil and gas supply. China is also a customer. Gazprom recently signed a massive multi-billion-dollar contract to supply China with East Siberian natural gas.
Wholesale selling has lifted Gazprom’s yield to 5% and pushed its P/E ratio down to a ridiculous 2.6 times the 2014 EPS estimate of $2.80.
The yield at most U.S. banks is anemic at best – 1% or 2%, 3% if you are lucky. OAO Sberbank (OTC: SBRCY), Russia’s largest bank, sports a 4.5% yield. Over the past five years Sberbank has seen its net interest income surge to $42 billion from $17 billion. Investors pay only a 4.7 multiple of 2014 EPS estimate of $1.79, and only 3.6 times the 2015 EPS estimate of $2.36, for such impressive growth.
To be sure, the worst is unlikely over for Russia on the international stage. The ride will be bumpy, but today’s depressed value points to higher prices down the road. The key is to focus on the horizon, not the tip of your nose. The probability of Russian life normalizing in a year or two is high (either continual political friction becomes the new norm, or Russia returns to pre-friction days), as is the probability today’s exceptional values will be bid away before Russia normalizes.
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