Focus Media: Analyzing the Analysts

Focus Media (FMCN), a former Wall Street darling, was one of the worst-performing Chinese stocks in 2008: Its shares plunged 84% during the past year, and the company was dropped from the NASDAQ-100 index. In this article, we analyze which Wall Street bank/ analyst made the right calls.

A decisive day for the stock in 2008 was Nov. 11, when it plummeted 45% in that single day after reporting disappointing financial results (Call Transcript). So our analysis was focused on Wall Street research published prior to Nov. 11. We concluded that three investment banks screwed up on Focus Media, while two banks made good calls. Below we list key quotes (evidence) from their research reports (some of them are really amusing):

BAD CALLS:

1.Broker: Morgan Stanley

• Analyst: Richard Ji
• Date: June 30, 2008
• Report Title: First Analyst Day Signaling Buying Opportunity
• Comments: "As the Disney movie, Bambi, put it, ‘If you can’t say something nice, don’t say nothing at all…’. As we expected, FMCN gave an upbeat session on its first ever analyst day post-IPO." "As Warren Buffett likes ‘toll-bridge’, so do we. We view FMCN as a de facto ‘toll-bridge’ for office building and supermarket adv in China, with 90%+ market share and pricing power to lift adv rate 20-30% p.a."

2. Broker: Sterne Agee

• Analyst: James Lee
• Date: September 8, 2008
• Report Title: New CEO A Big Step Up: Consistent Message To Rebuild Company Credibility
• Comments: "We came away from Focus Media analyst day with the following takeaways that should improve the investor sentiment: (1) new CEO Dr. Tan is definitely a BIG step up, delivering consistent messages to the investor community; (2) good visibility heading into 2H, backed by confident comments about 3Q and 4Q; (3) FCF should improve meaningfully as CFO reaffirmed capex expectations for 2H; (4) L-T margin targets are more convincing with the right system, controls and procedures in place"

3. Broker: Piper Jaffray

• Analyst: Gene Munster
• Date: November 10, 2008
• Report Title: Quarter Preview; Investor Concerns Overdone
• Comments: "Remain Positive, Reiterate Buy. We view September quarter results as another step towards regaining investor confidence. Looking ahead to the December quarter, the company said to expect improvements in gross margin, cash flow and DSO. The company also had confidence that it would beat Street revenue projections. FMCN continues to trade at a significant discount to its peers and we reiterate our buy rating on FMCN."

GOOD CALLS:

1. Broker: Deutsche Bank

• Analyst: Rebecca Jiang
• Date: October 8, 2008
• Report Title: Incorporating DB GDP revision – Ad Spending At Risk Under Macro Slowdown
• Comments: "DB lowered 2009-10 China GDP growth to 8.4% and 7%, respectively. While Focus’s management believes its business will be less affected than traditional media under the market slowdown, given the segment’s growing market share and cost-efficiency, we take a more cautious view as ad-spend has been historically highly correlated with GDP growth and outdoor ad-spend tends to be more volatile."

2. Broker: Pali Capital

• Analyst: Tian Hou
• Date: October 13, 2008
• Report Title: Adjusting Estimates And Price Target Due To Market Mentality
• Comments: "We are lowering our 2009 estimates for Focus Media not because we believe China’s economy would slow down significantly but rather we want to err on the side of conservatism given the impact of the global financial crisis."

Disclosure: No positions