This Chinese Stock Is a Mess

By Rick Aristotle Munarriz | More Articles
December 8, 2009 | Comments (6)

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Focus Media (Nasdaq: FMCN ) has a problem.

It's struggling exactly when it seems as though the world's most populous nation is humming along just fine. After posting a charge-riddled loss and a steep drop in year-over-year revenue generation last night, there seems to be more to Focus Media than meets the eye.

Focus Media specializes in out-of-home advertising networks. It powers a fleet of 125,000 LCD monitors that display graphical ads in high-traffic areas, and it runs a network of 262,000 in-elevator poster and digital frames. Focus Media operates 130 outdoor LED billboard displays in Shanghai and Beijing, along with a movie theater commercial platform and Web-based initiatives.

China was quick to bounce back from the global recession, but you wouldn't know it from Focus Media's latest financials. Revenue fell by 26% to $166.6 million, weighed down by a 32% hit in its LCD displays and a whopping 50% haircut on the poster frames.

Focus Media reported a huge loss of $0.99 per share, but there are impairment charges baked into that number. Calling off its deal to sell most of its assets to SINA (Nasdaq: SINA ) during the quarter also escalated the depreciation of expenses that were considered discontinued operations earlier in the year. However, even if we strip away the noise, non-GAAP profitability of $7.9 million is 89% lower than last year's production.

In short, Focus Media is a mess.

Advertising has been a surprisingly tough market in China this year. Sohu.com (Nasdaq: SOHU ) has been able to pad results with its vibrant online-gaming business. Baidu (Nasdaq: BIDU ) is in the sweet spot of paid search. However, out-of-home specialists, including AirMedia Group (Nasdaq: AMCN ) in airports and VisionChina Media (Nasdaq: VISN ) in mass transportation, are struggling these days.

The silver lining for Focus Media shareholders is that their company's balance sheet is backed by $383.3 million -- or nearly $3 a share -- in cash. However, Focus Media's stock has also tripled off its earlier lows, so the stock gains betray the dimming fundamentals as it leaps higher off its cash mattress.

Are Chinese stocks too risky to buy, or should they be part of every diversified portfolio? Share your thoughts in the comment box below.

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Focus Media Group, Baidu and Sohu.com are Motley Fool Rule Breakers picks. SINA is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he's longing to brush up on Mandarin and pay another visit. He owns no shares in any of the companies mentioned in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On December 08, 2009, at 4:41 PM, gluk108 wrote:

#1, the key reason why FMCN has not bounced back as quickly is because they get a lot of their advertising revenue from multinational advertisers. And these multinationals have been cautious to re-ramp their advertising spending, even in China, perhaps due to problems elsewhere in the world. At the end of the day, having multinationals make up a large chunk of their advertising base is a good thing - they are starting to ramp again to not miss out on one of the only growth markets in the world.
#2, the company took an additional $17 million "catch up" depreciation hit that was not added back (even in the non-GAAP numbers). This reflects depreciation on the "for sale" assets from 12/22/2008 through the cancellation of the SINA deal at the end of September, but is a non-cash charge. So non-GAAP net income is higher than that by $17 million less taxes.
Report this Comment On December 08, 2009, at 6:10 PM, hongchang wrote:

Oh no, not you again. Forget your bashing on DDRX from 22? Looks like you don't even know how to read earning report. You are truly pathetic!
Report this Comment On December 09, 2009, at 6:50 PM, edyboom223 wrote:

hi
Report this Comment On December 10, 2009, at 8:39 AM, Drexion wrote:

Its funny how these outdoor advertising companies are struggling while TMI's business is booming. I guess thats one of the benefits of having a superior business model with a multi-year government exclusivity contract protecting you from competition.
The sad part is TMI is only at 1/4 the P/E of these companies, is making more net-income than them, has a perfect balance sheet, and has a much higher growth profile for the next two years.
-Fernando
Report this Comment On December 10, 2009, at 8:39 AM, Drexion wrote:

Its funny how these outdoor advertising companies are struggling while TMI's business is booming. I guess thats one of the benefits of having a superior business model with a multi-year government exclusivity contract protecting you from competition.
The sad part is TMI is only at 1/4 the P/E of these companies, is making more net-income than them, has a perfect balance sheet, and has a much higher growth profile for the next two years.
-Fernando
Report this Comment On December 14, 2009, at 1:07 PM, hongchang wrote:

Rick, I wonder whether you can ever give good advise on stock investing. Maybe you should quit this bussiness of posting comment on stocks. How come a messy stock like this can gain 20% just a short few days you posting this garbage? Next time I see you name on the article and I will imediately close it. What a shame! DDRX and now FMCN.

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