Focus Media Holding Limited (ADR) (FMCN) reported earnings after the close on November 10, and the stock immediately gave up another 45% of its value.  The decline was in addition to devastating losses experienced as the stock has dropped from a high of $66 just one year ago.  Growth stock investors have been diving for cover, as company after company turns in disappointing guidance.

The reported numbers for FMCN were actually quite good.  Revenue came in at $224.8 million which was 63.7% higher than the third quarter last year.  Earnings after all non-cash adjustments were $0.53 compared to 38 cents the prior year.  Strength was seen in both the digital out-of-home advertising (revenue of $153.8 million) as well as Internet advertising (revenue of $70.8 million).  But despite a relatively encouraging third quarter, management’s discussion of the current business environment sent chills up investors spines.

Dr. Tan Zhi (CEO) bluntly stated that the company was experiencing the  most severe macro headwind in the modern history of the Chinese advertising industry.  Although the first half of the third quarter appeared to be relatively strong, management noted extreme weakness as the third quarter was drawing to a close and on into the fourth quarter.  Keep in mind that by the 10th of November when the release was issued, management had a fairly accurate view of how the fourth quarter was shaping up.

Guidance for fourth quarter earnings was a disappointing $0.45-0.46.  This compares unfavorably with last year’s fourth quarter of $0.51.  However, a silver lining could be the revenue estimates which are at $190-200 million, an increase of at least 12.5% over last year.  Focus Media is struggling to integrate several acquisitions from the past year which are driving expenses a bit higher.  This has had a negative effect on margins causing earnings for each unit of revenue to decline.

Despite the gloomy picture of the present advertising environment, management did have a few positive points for investors to ponder.  Dr. Zhi noted that based on discussions with their most prominent advertising clients, the company expects overall advertising growth in 2009.  The Chinese population continues to migrate towards urbanization, meaning the target market for advertising clients will continue to grow into the New Year.

Another strong point of interest is the fact that Focus Media sits on no debt and cash reserves of $373.1 million.  That cash level may appear small for investors stung by growth companies burning through capital at a breakneck pace.  But for FMCN, this reserve is quite good, considering the company operates a cash-flow positive model.  So there will not likely be any need to access capital markets at any point in the near future.

To further illustrate the company’s strong financial position, management noted that Focus re-purchased 1.6 million ADRs in the open market as of 11/10.  This is likely an efficient use of cash as it reduces the number of shares earnings must be spread across and essentially returns this capital to investors.

The stock is now trading at a level that discounts no growth and significant declines in earnings.  If China shows any signs of resurgence, and economic stability is realized, one could expect FMCN to perform very nicely.  The current distress gives investors an opportunity to buy this solid business at quite a discount.  While there is still risk that economic activity will come in below expectations, it appears the advertising market will rebound at some point over the next year and offer investors an attractive return on their capital.

FMCN Notes
FD: Author does not have a position in FMCN

Additional Reading:
TechTrader Daily: Focus Media Warns
WSJ.com: China Offers Stimulus Plan Details