Looking For Leadership

A recent pick of mine on Street Insight is Focus Media (FMCN).

Focus Media is an advertising company headquartered in China. The company provides audiovisual television display ads through a network of 72,000 flat-panel displays throughout China. The displays are placed in elevators, office lobbies, retail chain stores, beauty parlors, karaoke bars, golf country clubs, banks, hotels and airports.

FMCN has strong fundamentals and sports a reasonable valuation. Earnings and revenue growth have been growing at a torrid clip, basically growing at triple-digit rates over the last couple of years. Earnings are expected to grow +150% in 2006 and another +60% next year.

The company has beat earnings estimates in two of the last three quarters, and estimates continue to be revised materially higher. I think it is likely that next year’s estimates of $2.50 will prove conservative.

Even at the current level of estimates, the stock trades at a reasonable valuation. The stock currently trades at 25x forward estimates, which although rich at first glance, is a discount to both its current growth rate as well as its long-term projected growth rate (PEG ~ 0.8).

The technical picture for the stock is fairly positive. After recently breaking down below its 50-day average, the stock has now recaptured this key moving average, and done so in a fairly short period of time. Additionally, the stock was able to absorb a secondary offering during this time (see volume spike on chart below) and still work its way higher.

As such, the stock sports the highest relative strength rating (99) right now. A look at the chart also shows that money flow has turned positive. There is still some work ahead, as the stock needs to get back into the high 60s to avoid leaving a lower high on the chart. But that is how I’m willing to bet.

A recent upgrade by Piper Jaffray (with an $80 price target) said they were raising estimates due to good business momentum and positive ASP trends. They also said that FMCN is the best long-term vehicle to invest in the growth of advertising in China.


Long FMCN