Focus Media (FMCN) Regains its Focus

Shares of Focus Media Holding (FMCN: Charts, News), a Hong Kong-based display advertising company, surged last week after the company soundly beat earnings estimates. For its fourth quarter, Focus Media posted adjusted earnings of 70 cents per share, or $96 million, on revenue of $256.4 million.

Analysts had forecast earnings of 61 cents per share on revenue of $225.13 million. The company attributed its strong earnings to strong sales from its large LCD displays in high-traffic areas in China.

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Focus Media's business is split into two main segments - core and non-core businesses. Non-core revenue - from its LCD display, in-store, poster frame and movie theater networks - surged 63%, while revenue from its traditional (core) outdoor billboard advertisements rose 35%. The company had originally intended to sell 49% of its outdoor billboard business, but the plan was terminated when talks fell through. CEO Jason Jiang noted that its revenue was boosted slightly by an earlier Chinese Lunar New Year in 2012.

Looking forward to the first quarter, Focus Media expects its non-core businesses to bring in revenue between $177 to $179 million, while its core business is expected to gain $13 to $15 million. Analysts are forecasting total revenue of $183.5 million. The company's board also approved a dividend of approximately 13.7 cents per share for shareholders as of March 30.

Since last November, Focus Media has been targeted by several prolific American short sellers, most notably Muddy Waters LLC, which alleged that the company "overstated" the size of its LCD television network by categorizing some cardboard advertisements as LCD displays. This was a damaging claim, since proper LCD advertisements are estimated to generate approximately seven times the monthly revenue of static poster ads.

Muddy Waters also alleged that Focus Media overpaid for its acquisitions. Muddy Waters rated Focus Media as a "strong sell" in February. However, Susquehanna International Group LLP defended Focus Media against Muddy Waters' claims, and rated Focus Media shares "positive" with a 12-month price target of $45.

Meanwhile, Focus Media did not refute Muddy Waters' claim. The company stated that some static cardboard poster ads were included in its LCD network segment since they were installed by its LCD division, rather than its Framedia poster frame network. Focus Media's investor relations office Jing Lu stated that its LCD division is merely a "classification of business divisions", and not a category of products. This failed to assuage investors, and shares crashed 5% after the announcement.

However, on March 19, Focus Media revealed a new categorization system of LCD screen counts, on a "granular level". In other words, the company no longer categorizes poster frames and LCD screens together, redefining the murky terminology that Muddy Waters exploited in its report. The move improves transparency for investors and increases its defense against the rampant short selling plaguing small and mid cap U.S.-listed Chinese stocks.

During the fourth quarter, Focus Media also spent $810K to acquire a 51% stake in Shanghai Enjoy Media Advertising & Broadcasting, the operator of an e-commerce website and owner of a mobile IC-chip technology called the Q-card. Q-cards interact with Focus Media's LCD displays, and are considered a cutting edge technology for e-commerce retailers and advertisers. Currently 2.5 million people in China carry Q-cards.

Focus Media currently trades at 9.4 times forward earnings with a 5-year PEG ratio of 0.5, which makes it one of the cheapest Chinese growth stocks on the U.S. market. However, investors should be ready for some choppy trading as shares are extremely volatile. Dollar cost averaging would be the prudent way to slowly invest in stocks like Focus Media.

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Published on Mar 29, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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