Arbitrage Opportunity In China's Focus Media

| About: Focus Media (FMCN)

By Jonathan Yates

There is a buyout offer on the table for Focus Media (NASDAQ:FMCN), a Chinese advertising agency. This is an opportunity for arbitrage profits because the stock is trading well below the offer price of $27 per share from very solid investment firms. Even if the bid to take it private falls through, Focus Media is an appealing stock.

Based in Hong Kong, Focus Media has a very attractive balance sheet and income statement. As a dividend stock with allure for value investing, the firm is very appealing for investors seeking every bullish feature in one company. No matter what type of approach is favored by an investor (value, income, growth), the company has to make money or all approaches are doomed.

Focus Media has a very high profit margin of over 26%. In comparison, the profit margin for Apple (NASDAQ:AAPL) is also around 26%. And a balance sheet with virtually no debt and plenty of cash, just like Apple, leads to a strong capital structure for Focus Media.

For growth investing, Focus Media has a price-to-earnings growth (PEG) ratio of 0.25. The PEG is considered to be one of the most important financial indicators by legendary investor Peter Lynch. A PEG of one is considered to be adequate: the lower the better. (Apple's PEG is 0.74). Focus Media's PEG is no doubt what attracted the buyout bid.

Growth for the company currently is also very bullish. This year earnings-per-share growth is higher by 69.48%. Next year earnings-per-share growth is expected to rise another 20%. Sales growth is increasing by more than 30% on a quarterly basis.

As a dividend stock, Focus Media pays an income stream at the rate of 2.24% to shareholders. The average dividend yield for a member of the Standard & Poor's 500 Index is around 2%. With its high profit margin and rising earnings-per-share growth, dividend growth should be coming for shareholders.

The company was accused of massive fraud and insider trading a year ago, charges it has denied. But as with all investing in China, caution is always warranted.

Now trading around $24.24, the mean analyst target price over the next year of market action for Focus Media is $37.87. The mean analyst rating is a bullish 1.80 (5 is a Strong Sell with 1 being a Strong Buy). There is well over a 10% profit in the short term for those who buy now and wait for the $27 a share buyout price. Even if that does not transpire, Focus Media looks attractive for the long term.