Out of Focus in China

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Maybe Focus Media's (Nasdaq: FMCN) next ad campaign can be to clean up its own act.

China's advertising giant posted respectable third quarter results, but then rained on its own parade by warning of sequential weakness on the top and bottom lines.

The good news is that the third quarter was solid. Revenue climbed 64% to $224.8 million, as all segments of its offline and online marketing empire grew briskly off last year's levels. Earnings before stock-based compensation and acquisition-related items clocked in at $0.53 a share, up from $0.43 a share a year earlier.

The bad news is that company sees adjusted earnings of just $0.45 a share to $0.46 a share in the current quarter, on $190 million to $200 million in revenue. The guidance suggests a sequential dip, with earnings also taking a year-over-year dip. It's also naturally well short of the $0.57 per share profit on $248.4 million in revenue that Wall Street was expecting.  

Don't panic if you have skin in China's ad market. A marketing slowdown in the world's most populous nation would impact all of the players, but Focus Media was already showing a weak hand. For instance, the company's online ad revenue may have kicked in with a 67% year-over-year boost in its latest quarter, but it delivered a disappointing 7% decline compared to its second quarter showing. You don't see that elsewhere. Sohu.com (Nasdaq: SOHU) and Baidu.com (Nasdaq: BIDU) posted sequential gains of 18% and 14% during the same three months.

Baidu also projects a sequential gain in the current quarter. Sohu sees a small dip in ad-related revenue, but will more than make up for it with online gaming.

Focus Media doesn't have that luxury. It is a pure-play advertiser through its massive deployment of LCD displays, in-store monitors, and elevator poster frames. This doesn't mean that Focus Media can find a scapegoat in real-world marketing. AirMedia (Nasdaq: AMCN), an operator of ad networks in major Chinese airports, actually raised its guidance last week. Shares of VisionChina (Nasdaq: VISN), which manages advertising on buses and subways in China, soared 19% yesterday after the company provided an upbeat outlook.

In short, China may be hitting a little economic turbulence but it's Focus Media that is taking most of the lumps.

The good news is that the company's stock has approached ridiculous valuations. With nearly $3 a share in cash, the company is well-positioned to ride out any economic lull. It is also trading for less than book value, even though half of that equity is in the form of goodwill after a string of acquisitions in recent years. Focus Media is also trading at an earnings multiple in the single digits, now that it expects to post adjusted profits of $1.76 a share to $1.77 a share this year. Last night's news is clearly weighing on the stock this morning, but the valuations are too attractive to pass up at this point. Warts and all, Focus Media is a dirt-cheap Chinese stock.

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