China Comes Into Focus

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Sunday-night conference calls are rare -- unless you consider that digital advertising giant Focus Media (Nasdaq: FMCN  ) operates in China, where our Sunday night is a perfectly reasonable Monday morning. Either way, the news Focus announced was a sweet way to kick off the new trading week.

Focus Media's revenue soared 107% to $211.7 million. Earnings clocked in at $0.44 a share, once you backed out acquisition-related items, restructuring charges, and stock-based compensation expenses. On that adjusted basis, Wall Street expected a profit of just $0.40 a share, with $191.8 million on top.

The bottom line didn't keep pace with revenues' rise. Margins got creamed, partly because of May's Sichuan earthquake, which disrupted operations and advertising patterns. Analysts knew this, of course. Focus Media had talked down its profit-squeezing prospects two months ago, when it posted its first-quarter numbers. The important takeaway is that the company's business improved substantially as June rolled along.

July and August aren't looking too shabby, either. Focus Media is looking to post non-GAAP earnings of $0.53 a share to $0.54 a share, comfortably ahead of the $0.49 a share in adjusted profits that Mr. Market is expecting.

Focus Media's eye candy is clearly in demand by consumer brand sponsors who want to introduce their products to China's fast-growing economy.

The company's biggest business is digital out-of-home advertising. Its network of 123,140 flat-panel displays play ads and content in locations with high pedestrian traffic. The company also has a fleet of in-elevator poster frames and high-tech outdoor billboards. Display advertising is big business in China. Just ask specialists like AirMedia (Nasdaq: AMCN  ) in airports, or VisionChina (Nasdaq: VISN  ) on bus and train systems. In sum, digital out-of-home advertising carves out a thick 64% slice of the company's revenue.

The fastest-growing segment, though, is online advertising. Revenue there roughly tripled, to $76.1 million during the quarter. That compares nicely with the $117 million that market leader (Nasdaq: BIDU  ) rang up during the same three months. (Nasdaq: SOHU  ) generated just $42 million in brand advertising revenue this past quarter.

This doesn't mean that Focus Media deserves the rich multiples commanded by companies like Baidu, Sohu, or even global advertising juggernaut Google (Nasdaq: GOOG  ) . Focus Media has margins and a capital-intensive business beyond cyberspace to build out. However, with shares priced at just 11 times next year's projected earnings, that's a low price to pay for such heady top-line growth.

I see you, Focus Media. In China, I guess everyone does.  

Further Foolish perspectives:

Baidu, Google, and Focus Media are selections in the Rule Breakers growth-stock newsletter service. Focus Media is also a Global Gains selection.  You don't need an in-elevator poster frame to tell you about the 30-day free trial subscriptions for either service.

Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he's longing to brush up on Mandarin and go again. He does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a highly visible disclosure policy.

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