In early September, I advised investors to buy Focus Media (FMCN) shares because the stock price of $19.36 had largely reflected worries about a potential "double dip" recession and its impact on global ad spending. This overshadowed Focus Media's turnaround story. Focus Media's stock price has risen 24.3% since then due to three reasons: First, recent macroeconomic data indicates a "double-dip" is unlikely to happen. Second, CEO Jason Jiang's recent share sale removed a major overhang for the stock. Third, the company bought back shares from major shareholder Fosun, boosting earnings per share. After the recent price rally, I believe the market has correctly valued Focus Media shares at the current price of $24.07. My virtual portfolio has exited its long position on the stock for a 24.3% gain.
Increased investor expectations leaves Focus Media limited possibility to surprise the market. Based on my checks, Focus Media's business has progressed well in Q3 and Q4, on the back of the continuing recovery in ad spending in China. I forecast Focus Media will grow revenue by 9%-15% year-over-year in 2010 to $550-580 million, and grow non-GAAP EPS by 54%-62% Y/Y to $1.05-$1.10.
Based on my calculations, currently investors on average are estimating around 60% Y/Y EPS growth in 2010. That's in line with my forecast and up from 30% in early September. The change of annual growth estimate from 30% to 60% indicates the market has corrected its prior underestimation of Focus Media's earnings potential. After recent adjustments in investor sentiment and stock price, I believe now there is very limited chance for Focus Media to surprise the market, and it makes sense to take a neutral stance on the stock now.
Disclosure: No positions