Focus Media Holding Limited: Signs of the Times

Focus Media Holding Limited (ADR) (FMCN) reported earnings after the close on November 10, and the stock immediately gave up another 45% of its value. The decline was in addition to devastating losses experienced as the stock has dropped from a high of $66 just one year ago. Growth stock investors have been diving for cover, as company after company turns in disappointing guidance.

The reported numbers for FMCN were actually quite good. Revenue came in at $224.8 million which was 63.7% higher than the third quarter last year. Earnings after all non-cash adjustments were $0.53 compared to 38 cents the prior year. Strength was seen in both the digital out-of-home advertising (revenue of $153.8 million) as well as Internet advertising (revenue of $70.8 million). But despite a relatively encouraging third quarter, management’s discussion of the current business environment sent chills up investors spines.

Dr. Tan Zhi (CEO) bluntly stated that the company was experiencing the most severe macro headwind in the modern history of the Chinese advertising industry. Although the first half of the third quarter appeared to be relatively strong, management noted extreme weakness as the third quarter was drawing to a close and on into the fourth quarter. Keep in mind that by the 10th of November when the release was issued, management had a fairly accurate view of how the fourth quarter was shaping up.

Guidance for fourth quarter earnings was a disappointing $0.45-0.46. This compares unfavorably with last year’s fourth quarter of $0.51. However, a silver lining could be the revenue estimates which are at $190-200 million, an increase of at least 12.5% over last year. Focus Media is struggling to integrate several acquisitions from the past year which are driving expenses a bit higher. This has had a negative effect on margins, causing earnings for each unit of revenue to decline.

Despite the gloomy picture of the present advertising environment, management did have a few positive points for investors to ponder. Dr. Zhi noted that based on discussions with their most prominent advertising clients, the company expects overall advertising growth in 2009. The Chinese population continues to migrate towards urbanization, meaning the target market for advertising clients will continue to grow into the New Year.

Another strong point of interest is the fact that Focus Media sits on no debt and cash reserves of $373.1 million. That cash level may appear small for investors stung by growth companies burning through capital at a breakneck pace. But for FMCN, this reserve is quite good, considering the company operates a cash-flow positive model. So there will not likely be any need to access capital markets at any point in the near future.

To further illustrate the company’s strong financial position, management noted that Focus re-purchased 1.6 million ADRs in the open market as of 11/10. This is likely an efficient use of cash as it reduces the number of shares earnings must be spread across and essentially returns this capital to investors.

The stock is now trading at a level that discounts no growth and significant declines in earnings. If China shows any signs of resurgence, and economic stability is realized, one could expect FMCN to perform very nicely. The current distress gives investors an opportunity to buy this solid business at quite a discount. While there is still risk that economic activity will come in below expectations, it appears the advertising market will rebound at some point over the next year and offer investors an attractive return on their capital.

FMCN Notes

Disclosure: Author does not have a position in FMCN.

Comments

[chinesezodi...:]

Another company whose stock is outrageously overvalued, even if one is of the opinion that it's recent highs were also a bit overdone..... thanks for the heads-up. No debt also makes FMCN attractive....

2008 Dec 01 05:02 AM

[chinesezodi...:]

...excuse me, I meant undervalued!

2008 Dec 01 05:08 AM

[Zachary Sch...:]

haha - You had me confused there for a second.

Thanks for the comment - it may take some time, but I believe FMCN has some strong fundamental prospects that will eventually be realized.

Zach
zachstocks.com

2008 Dec 02 03:35 PM

[Savage Capital:]

This stock is completely disconnected from the fundamentals. There is no reason to talk about them. Why? Because it will go nowhere until the cfo is gone and the founder is out. They gave guidance on Sept analyst day and then came in light without an explanation. They held a 3 minute conference call and refused to give a realistic answer to a single analyst. You are a sucker if you think this thing is worth buying because its cheap. Wakeup. My guess is it sits between 3 and 13 for 1H09, and maybe it will catch a bid if the mgmt gets ousted or they sell all/pieces of the business. Cant make a conviction buy or sell call on this one at these levels.

2008 Dec 15 06:33 PM

[Savage Capital:]

and how is buying back adr's a good thing? they are telling you that either: a. there is no growth out there they can acquire the way they once did, or, b. there is growth that can be acquired but theyre too incompetent to integrate/structure a deal (CGEN).

they have no debt. wow. they could have all the cash in the world and it wouldnt matter if it turns out theyre cooking the books, which remains the bear case out there. i dont believe they are, but that massive short interest that keeps going up every time the stock rallies tells me someone else does.

ad lags into a downturn. ad lags out. why bother being early on the chinese economy by getting long a low quality company w/ a garbage management team and possibly a broken growth story?

the chinese consumer is going to be absent for a long time. these people save tons. things have been good for some time, but they can remember the way things were 35 yrs ago. thus, theyre going to save more. there is no demand from the west to save them. the govt wont directly stimulate businesses to advertise.

and, most importantly of all, only 25% of their population has a pot to piss in.

maybe find yourself a nice porcelain company to invest in instead.

2008 Dec 15 09:42 PM