Focus Media Holding (FMCN): Innovation in Chinese advertising

There is a Shanghai firm that has established itself as an advertising powerhouse by recognizing that innovation generates profits. The company conveys clients' messages by way of 200,000 flat panel TVs.

Focus Media Holding (NASDAQ: FMCN) operates an advertising network of public television displays in China. The devices are placed in high-traffic areas, such as office buildings, hotels, airports, retail chain stores and the public areas of residential complexes. In all, the company runs nearly 200,000 display units. It also operates an advertising network for the Chinese mobile telecommunications market and recently acquired China's largest Internet advertising agency. Clients include Coca-Cola (NYSE: KO), Yum! Brands (NYSE: YUM) and Procter & Gamble (NYSE: PG).

FMCN investors were pleased late last month, when the company said that an internal investigation did not find evidence of alleged undisclosed rebate payments to a third-party advertising agency through a related party. Focus Media filed its annual report and audited financial statements for 2006, which had been delayed as a result of the investigation. Susquehanna Financial initiated coverage of the shares with a "positive" rating. Then, management reported fiscal Q2 EPS of 38 cents and revenues of $113.3 million. Analysts had been expecting 34 cents and $102.2 million. Officials also guided Q3 EPS to 41-43 cents (43 cent consensus), Q3 revenues to $132-$135 million ($115.51M consensus) and full-year 2007 revenues to $440-$450 million ($409.65M consensus). CIBC World Market and WR Hambrecht reiterated "buy" recommendations and boosted their price targets to $70. The stock popped into a bullish "flag" consolidation pattern on the news. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.