Remember when making the argument for Focus Media (Nasdaq: FMCN ) as a growth stock was a piece of marketing cake? Now we're down to scratching our heads as we approach Focus Media as a ridiculously mispriced value stock.
This isn't exactly a good thing, but read on and decide for yourself.
The company's fourth-quarter results were a little less than Wall Street was expecting. The adjusted $0.39 a share on $192.1 million wasn't good enough when analysts were betting on a non-GAAP profit of $0.44 a share on $193.8 million.
The results grow even more uninspiring when you compare the businesses that Focus Media will be keeping to the moneymakers that it agreed to sell to SINA (Nasdaq: SINA ) three months ago.
Continuing operations accounted for $7.3 million in net income on $87.2 million in revenue. The discontinued operations that it will likely hand over to SINA next quarter were good for $42.7 million in adjusted profitability on $104.9 million in revenue. In other words, net margins clocked in at 8% for what Focus Media is keeping and a healthy 41% for what it's selling.
The upside, of course, is that SINA is hungry enough for advertising help that it has no problem paying up for Focus Media's high-margin, out-of-home advertising arms. Focus Media will be receiving 47 million shares of SINA, which it will distribute to its shareholders.
Here is where the growth stock earns its value investing wings. Focus Media has 128.6 million shares outstanding after recent share repurchases. Divide the number of SINA shares that will be issued into the company's existing share count and you get a ratio of roughly 0.365 of SINA for every Focus Media share held. If the ratio holds up, it would translate into $8.36 a share in SINA value for every share of Focus Media based on last night's close of $22.91. That is a juicy 46% premium to where Focus Media closed last night.
It gets better. Focus Media will be keeping $142.4 million -- or $1.11 a share -- of the $422.9 million in cash it presently has on its balance sheet. Add the cash and SINA stock, and it's now a 65% premium to Focus Media's stock.
The gravy here is that Focus Media will also be keeping profitable -- though obviously working off leaner margins -- businesses like Chinese online ad specialist Allyes, a movie theater advertising network, and a few conventional billboards.
Sure, there's a reason why SINA passed on these remains of the day. It's not just the crummy margins. Focus Media sees continuing revenue of at least $55.5 million during the current quarter, indicating a sharp sequential decline of as much as 36%.
Investors certainly have plenty of ways to play the advertising market in China. Baidu.com (Nasdaq: BIDU ) is the undisputed search engine champ. There are also a few niche-specific marketing mavens like AirMedia (Nasdaq: AMCN ) in airports and VisionChina (Nasdaq: VISN ) in mass transportation.
Focus Media likely has the biggest warts of them all.
So, what's a growth investor to do when a pre-Olympics winner like Focus Media goes from medal contention to being booted as worthless? It's your call, as growth investors sell their stakes to value investors.
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