Looking at Focus Media Through Warren Buffett's Lens

| About: Focus Media (FMCN)

Focus Media (NASDAQ:FMCN) will release its 4th quarter report on February 26. It will probably be another amazing quarter for Focus Media, the company that dominates Chinese indoor advertising. The company estimates that the 4th quarter net income will be between $34 to $35 M USD.

The main goal of this article is to try to predict what is expected of Focus Media in the long run, and to check if the company internal value is attractive. The methodology that I used used is Warren Buffett's tried-and-true value approach.

Focus has 3 major advantages:

1. Great management – I have been reviewing Chinese internet and media stocks for two years now. I don't know many companies whose management reports are so accurate and demonstrate such a big success. Also the quality of the reporting is remarkable.

2. Dominant position in the market – Focus has control of over 90% of the indoor advertisement market. The company acquired its major competitor last year and by that increased its dominance in the market. Now the company is constantly increasing the pricing whereby it can maintain it remarkable growth trend.

3. According to the internal value approach the company value is $27.8 B USD, which means safety margins of 85% compared to the current market cap. Looks like a good return vs. risk investment.

The data that was used in order to do the evaluation:

  • 35% - Annual growth during the following decade (Currently the quarterly growth rate is about 30%).
  • 5% - Annual growth after the following decade.
  • 10% – Yearly interest rate.
  • Now I want to balance this article and to state two reasons why Warren Buffet would probably not buy Focus media:

    1. The company is not operating in a sector that Warren Buffet focuses on.

    2. The company history is relatively short (less than 5 years).

    To summarize, it is nevertheless highly recommended for value investors to check Focus Media for the long run.

    FMCN 1-yr chart
    FMCN

    Disclosure: Author is long FMCN.