Focus Media Should Stem Losses on Actionable Call from Goldman

Goldman Sachs is out with an Actionable Call on Focus Media (FMCN) saying that in their view, poor free cash flow generation has to some extent undermined P/E-based valuations for Focus' stock, with investing cash outflows generally exceeding operating cash inflows since 4Q2006. Following a discussion with management, the Firm believes 2Q2008 could be the first of several quarters of substantial free cash flow generation, as Focus has already made its 2008 payment for CGEN in 1Q2008 and as receivable days outstanding should improve due to seasonality.

Focus is trading at 29X 2009E free cash flow estimates and 13X 2010E, assuming lower earn-outs in 2010E. After reviewing Focus' treatment of amortization and stock based compensation [SBC], the Firm raised GAAP earnings estimates by 33% for 2008E, 16% for 2009E, and 13% for 2010E, partly reversing excessive reductions made following 1Q2008 results.

Goldman notes they are frustrated by Focus' recent accounting complexities (such as extra amortization) and guidance, but believe that in this specific instance of cutting guidance due to the Chinese earthquake's after-effects, investors have penalized Focus for foregone revenue of $40 million by reducing its market capitalization by close to $1 billion.

Reiterates Buy and $58 target saying they believe a quarter of positive free cash flow and the prospect of more to follow should calm market concerns about Focus' accounting and ability to grow organically.

Notablecalls: What can I say, this is an Actionable Call from Goldman Sachs. The stock got trashed despite several bullish defenses over the past couple of days but I think Goldman's Mitchell Haol will stop the fall. He went out and spoke to management, getting extra (actionable) details. That's what every analyst out there should be doing. Watch & learn!

I expect FMCN to trade higher today and in the coming days.

Comments

[agnostic:]

Just because it was a GS call this stock should go up? FMCN will trade lower with the general market volatility. Also on FCF basis, the stock still looks expensive.

2008 Jun 10 03:03 PM

[PhillyD:]

They're investing in more and more screens to put advertising on. They have these screens 'booked' for the forseeable future and other than capital investments are generating cash at a fast and furious clip. This stock is way undervalued to their future FCF and those who invest now will be paid handsomly ... especially in 2009. Is 50% or more growth in less than a year something we can all use? Then FMCN is a great investment.

Long FMCN.

2008 Jun 11 12:10 PM

[cheryl_stevens:]

You cannot look at FCF on a textbook basis, in this case, FCF is not meaningful, because FMCN was incurring a stream of cash outlays of different sizes due to acquisitions. Gross margin of 45% to 50% from the digital-out-of-home is a more logical view, I think this is a Warren Buffet stock, wide moat, decent managers, good price, more and more profitable 10 yrs from now.
Another reason to confirm that this market is not efficient, the same FCF number for everybody to see, but with vastly different views.

2008 Jun 14 04:15 AM