Focus Media Basking in the Near-Term Glow

Updated from Nov. 24

BEIJING -- Shares of Focus Media FMCN are flirting with historic highs, up 14% since the Chinese advertiser beat third-quarter earnings expectations last Tuesday.

Based on Friday's close of $68.16, Focus Media has more than doubled in value so far this year, boasting a 102% rise.

The Shanghai-based firm's strategy: push deeper into existing markets in China's richest big cities and accelerate the move into less affluent, fast-developing cities, all the while continuing to scoop up smaller ad firms.

In a move CEO Jason Jiang said would "strengthen our focus" on expansion in China's second tier of cities in 2007, the company on Monday named a new chief operating officer, former head of marketing Diana Congrong Chen.

The company is a pure play on the rapid growth of Chinese advertising, a sector much cherished by investors of late. Focus Media makes money by running ads over a network of company-built displays in offices and supermarkets. Through a handful of acquisitions, it has also branched into new markets, advertising on street-side digital billboards and cell phones.

So what are the chances Focus shares can stay aloft? Keep in mind that the stock reached similar levels last May, then suffered a summer retreat before eventually rebounding to current heights. This stock is no stranger to volatility.

Growing bullishness on the China ad market could help Focus Media sustain its recent gains. But in the longer term, there are some big caveats to keep in mind.

First, a quick review of the bullish case: The ad firm's growth has been impressive, as reflected in its third-quarter results. Sequential revenue jumped 21% to $51.1 million, and year-on-year sales jumped a whopping 214%, boosted by half a dozen acquisitions over the past 12 months.

"The story for this company focuses on the profitability and leverage inherent in its fixed-cost business model," writes Citigroup analyst Jason Brueschke in a post-earnings note. Brueschke, who has a buy rating on the shares, lifted his earnings estimates for 2006 by a healthy 9% in reaction to the quarter. (Citigroup has done investment banking for Focus Media within the past year.)

It hardly hurts that 2007 is shaping up to be a banner year for ad firms in China, helped along by the lead-up for the 2008 Beijing Olympics. Chief financial officer Daniel Wu said on the conference call that Focus Media is "well-positioned to participate in this strong growth in 2007."