Focus Media (FMCN), a former Wall Street darling, was one of the worst-performing Chinese stocks in 2008: Its shares plunged 84% during the past year, and the company was dropped from the NASDAQ-100 index. In this article, we analyze which Wall Street bank/analyst made the right calls.
A decisive day for the stock in 2008 was Nov. 11, when it plummetted 45% in that single day after reporting disappointing financial results. So our analysis was focused on Wall Street research published prior to Nov. 11. We concluded that three investment banks screwed up on Focus Media, while two banks made good calls. Below we list key quotes (evidence) from their research reports (some of them are really amusing):
BAD CALLS:
1.Broker: Morgan Stanley
- Analyst: Richard Ji
- Date: June 30, 2008
- Report Title: First Analyst Day Signaling Buying Opportunity
- Comments: "As the Disney movie, Bambi, put it, ‘If you can’t say something nice, don’t say nothing at all…’. As we expected, FMCN gave an upbeat session on its first ever analyst day post-IPO." "As Warren Buffet likes ‘toll-bridge’, so do we. We view FMCN as a de facto ‘toll-bridge’ for office building and supermarket adv in China, with 90%+ market share and pricing power to lift adv rate 20-30% p.a."
2. Broker: Sterne Agee
- Analyst: James Lee
- Date: September 8, 2008
- Report Title: New CEO A Big Step Up: Consistent Message To Rebuild Company Credibility
- Comments: "We came away from Focus Media analyst day with the following takeaways that should improve the investor sentiment: (1) new CEO Dr. Tan is definitely a BIG step up, delivering consistent messages to the investor community; (2) good visibility heading into 2H, backed by confident comments about 3Q and 4Q; (3) FCF should improve meaningfully as CFO reaffirmed capex expectations for 2H; (4) L-T margin targets are more convincing with the right system, controls and procedures in place"
3. Broker: Piper Jaffray
- Analyst: Gene Munster
- Date: November 10, 2008
- Report Title: Quarter Preview; Investor Concerns Overdone
- Comments: "Remain Positive, Reiterate Buy. We view September quarter results as another step towards regaining investor confidence. Looking ahead to the December quarter, the company said to expect improvements in gross margin, cash flow and DSO. The company also had confidence that it would beat Street revenue projections. FMCN continues to trade at a significant discount to its peers and we reiterate our buy rating on FMCN."
GOOD CALLS:
1. Broker: Deutsche Bank
- Analyst: Rebecca Jiang
- Date: October 8, 2008
- Report Title: Incorporating DB GDP revision – Ad Spending At Risk Under Macro Slowdown
- Comments: "DB lowered 2009-10 China GDP growth to 8.4% and 7%, respectively. While Focus’s management believes its business will be less affected than traditional media under the market slowdown, given the segment’s growing market share and cost-efficiency, we take a more cautious view as ad-spend has been historically highly correlated with GDP growth and outdoor ad-spend tends to be more volatile."
2. Broker: Pali Capital
- Analyst: Tian Hou
- Date: October 13, 2008
- Report Title: Adjusting Estimates And Price Target Due To Market Mentality
- Comments: "We are lowering our 2009 estimates for Focus Media not becausewe believe China’s economy would slowdown significantly but ratherwe want to err on the side of conservatism given the impact of the global financial crisis."
Wednesday, January 28, 2009
Wednesday, December 17, 2008
Goldman Sachs' Track Record on Baidu.com (NASDAQ:BIDU)
Baidu (NASDAQ:BIDU) shares surged after being upgraded by Goldman Sachs on December 16. The market's initial reaction was not surprising given Goldman's brand name, but it is still prudent to check the track record of Goldman's calls on BIDU, as summarized below. We assigned "Good" or "Bad" to each call, and calculated an overall "shooting percentage" at the end.
Sep 14, 2005: Goldman initiatied coverage with an Underperform (Sell) rating. Analysts believed BIDU's price ($113.59) was significantly higher than their estimated fair value of $27. BIDU dropped 29% to $81.05 by Oct 26, 2005, when the next major call was made. GOOD CALL.
Oct 26, 2005: Commenting on 3Q05 results, analysts saw 30%+ downside - they still believed BIDU's valuation was unjustifiable, even after applying aggressive assumptions. BIDU dropped 36% to $51.69 by Feb 21, 2006. GOOD CALL.
Feb 22, 2006: Commenting on 4Q05 results, analysts saw 20% downside to after-market level - they still believed BIDU's valuation was stretched even after applying aggressive assumptions. BIDU rose 19% to $61.38 by May 9, 2006. BAD CALL.
May 9, 2006: Commenting on 1Q06 results, analysts believed BIDU traded 10% above fair value, and its P/E multiple was at a 75% premium to Chinese Internet peers and 10% premium to Google. BIDU rose 50% to $91.97 by Jul 26, 2006. BAD CALL.
Jul 27, 2006: Commenting on 2Q06 results, analysts believed results were negative for BIDU because its revenue did not outperform market expectation. They saw additional pressure from the 16 million lock-up shares that were pending. BIDU dropped 5% to $87.28 by Oct 31, 2006. GOOD CALL.
Nov 1, 2006: Commenting on 3Q06 results, analysts upgraded BIDU to Neutral from Sell. They would not be a buyer of the stock because execution risks were expected to last several quarters. BIDU rose 34% to $117 by Dec 15, 2006. BAD CALL.
Dec 18, 2006: Analysts raised target price to $128 from $93 based on more optimistic outlook for margins. They increased long-term growth estimate from 25% to 30% and believed competitive pressures were less than previously estimated. BIDU dropped 2% to $114.51 by Feb 14, 2007. BAD CALL.
Feb 15, 2007: Commenting on 4Q06 results, analysts maintained Neutral rating and $128 price target. They became more concerned with outlook of Chinese paid search industry, due to BIDU's efforts to diversify from paid search to brand ad and from China to Japan. BIDU dropped 8% to $105.78 by Apr 26, 2007. GOOD CALL.
Apr 27, 2007: Commenting on 1Q07 results, analysts slighly increased future estimates, and raised target price from $128 to $134, but noted BIDU was fairly valued at after-market level (around $134). BIDU rose 66% to $175.74 by Jul 24, 2007. BAD CALL.
Jul 25, 2007: Commenting on 2Q07 results, analysts noted BIDU missed profit margin expectations for the first time. They raised target price from $135 to $185. They thought BIDU might dropped from after-market level of $218. BIDU rose 95% to $341.99 by Oct 25, 2007. BAD CALL.
Oct 26, 2007: Commenting on 3Q07 results, analysts increased target price from $185 to $310, and significantly increased revenue and EPS estimates for 2007 and 2008. BIDU dropped 24% to $261.09 by Feb 13, 2008. BAD CALL.
Feb 14, 2008: Commenting on 4Q07 results, analysts decreased revenue and profit forecasts because of unfavorable trends in guidance and profit margins. They reduced target price from $310 to $280. BIDU rose 34% to $349.66 by Apr 23, 2008. BAD CALL.
Apr 24, 2008: Commenting on 1Q08 results, analysts increased revenue forecast by 6% and profit forecast by 4%, and target price from $280 to $310. BIDU dropped 17% to $288.70 by Jul 23, 2008. BAD CALL.
Jul 24, 2008: Commenting on 2Q08 results, analysts kept their revenue projections for 2008, 2009, and 2010, but increased EPS estimates signifcantly for these three years. They raised target price from $310 to $350. BIDU dropped 14% to $249.09 by Oct 22, 2008. BAD CALL.
Oct 23, 2008: Commenting on 3Q08 results, analysts slightly decreased revenue estimates while increasing forecasts on operating income. They noted that for Baidu, growing revenue was more important than controlling costs. BIDU dropped 53% to $118.09 by Dec 15, 2008. GOOD CALL.
Dec 16, 2008: Goldman rated BIDU as a "Buy" for the first time in their history of covering the stock. Analysts believed BIDU's P/E ratio was reasonable compared with its growth potential and peer stocks' P/E multiples. The stock surged on the upgrade. We will have to wait for some time before deciding whether it was a good call.
In conclusion, Goldman made 5 good calls on BIDU, out of the total 15, before they upgraded BIDU to Buy. The "shooting percentage" was 33%.
Disclosure: We don't have a position in BIDU. The judgment on each call was our own opinion.
Sep 14, 2005: Goldman initiatied coverage with an Underperform (Sell) rating. Analysts believed BIDU's price ($113.59) was significantly higher than their estimated fair value of $27. BIDU dropped 29% to $81.05 by Oct 26, 2005, when the next major call was made. GOOD CALL.
Oct 26, 2005: Commenting on 3Q05 results, analysts saw 30%+ downside - they still believed BIDU's valuation was unjustifiable, even after applying aggressive assumptions. BIDU dropped 36% to $51.69 by Feb 21, 2006. GOOD CALL.
Feb 22, 2006: Commenting on 4Q05 results, analysts saw 20% downside to after-market level - they still believed BIDU's valuation was stretched even after applying aggressive assumptions. BIDU rose 19% to $61.38 by May 9, 2006. BAD CALL.
May 9, 2006: Commenting on 1Q06 results, analysts believed BIDU traded 10% above fair value, and its P/E multiple was at a 75% premium to Chinese Internet peers and 10% premium to Google. BIDU rose 50% to $91.97 by Jul 26, 2006. BAD CALL.
Jul 27, 2006: Commenting on 2Q06 results, analysts believed results were negative for BIDU because its revenue did not outperform market expectation. They saw additional pressure from the 16 million lock-up shares that were pending. BIDU dropped 5% to $87.28 by Oct 31, 2006. GOOD CALL.
Nov 1, 2006: Commenting on 3Q06 results, analysts upgraded BIDU to Neutral from Sell. They would not be a buyer of the stock because execution risks were expected to last several quarters. BIDU rose 34% to $117 by Dec 15, 2006. BAD CALL.
Dec 18, 2006: Analysts raised target price to $128 from $93 based on more optimistic outlook for margins. They increased long-term growth estimate from 25% to 30% and believed competitive pressures were less than previously estimated. BIDU dropped 2% to $114.51 by Feb 14, 2007. BAD CALL.
Feb 15, 2007: Commenting on 4Q06 results, analysts maintained Neutral rating and $128 price target. They became more concerned with outlook of Chinese paid search industry, due to BIDU's efforts to diversify from paid search to brand ad and from China to Japan. BIDU dropped 8% to $105.78 by Apr 26, 2007. GOOD CALL.
Apr 27, 2007: Commenting on 1Q07 results, analysts slighly increased future estimates, and raised target price from $128 to $134, but noted BIDU was fairly valued at after-market level (around $134). BIDU rose 66% to $175.74 by Jul 24, 2007. BAD CALL.
Jul 25, 2007: Commenting on 2Q07 results, analysts noted BIDU missed profit margin expectations for the first time. They raised target price from $135 to $185. They thought BIDU might dropped from after-market level of $218. BIDU rose 95% to $341.99 by Oct 25, 2007. BAD CALL.
Oct 26, 2007: Commenting on 3Q07 results, analysts increased target price from $185 to $310, and significantly increased revenue and EPS estimates for 2007 and 2008. BIDU dropped 24% to $261.09 by Feb 13, 2008. BAD CALL.
Feb 14, 2008: Commenting on 4Q07 results, analysts decreased revenue and profit forecasts because of unfavorable trends in guidance and profit margins. They reduced target price from $310 to $280. BIDU rose 34% to $349.66 by Apr 23, 2008. BAD CALL.
Apr 24, 2008: Commenting on 1Q08 results, analysts increased revenue forecast by 6% and profit forecast by 4%, and target price from $280 to $310. BIDU dropped 17% to $288.70 by Jul 23, 2008. BAD CALL.
Jul 24, 2008: Commenting on 2Q08 results, analysts kept their revenue projections for 2008, 2009, and 2010, but increased EPS estimates signifcantly for these three years. They raised target price from $310 to $350. BIDU dropped 14% to $249.09 by Oct 22, 2008. BAD CALL.
Oct 23, 2008: Commenting on 3Q08 results, analysts slightly decreased revenue estimates while increasing forecasts on operating income. They noted that for Baidu, growing revenue was more important than controlling costs. BIDU dropped 53% to $118.09 by Dec 15, 2008. GOOD CALL.
Dec 16, 2008: Goldman rated BIDU as a "Buy" for the first time in their history of covering the stock. Analysts believed BIDU's P/E ratio was reasonable compared with its growth potential and peer stocks' P/E multiples. The stock surged on the upgrade. We will have to wait for some time before deciding whether it was a good call.
In conclusion, Goldman made 5 good calls on BIDU, out of the total 15, before they upgraded BIDU to Buy. The "shooting percentage" was 33%.
Disclosure: We don't have a position in BIDU. The judgment on each call was our own opinion.
Thursday, December 11, 2008
Baidu.com (NASDAQ:BIDU): Citigroup Cuts Estimates due to Economic and Competitive Concerns
Citigroup is out with a negative call on Baidu.com (NASDAQ:BIDU) after the company cut 4Q08 guidance in a pre-announcement. Firm believes Baidu reduced guidance by an "unexpectedly large" amount, and suggest investors to sell into strength.
Firm notes Baidu has never missed guidance since its IPO back in Aug. 2005. They found it alarming that Baidu cited economic concerns as a reason for lowering guidance, because during two very recent conference calls (Oct 22nd and Nov 19th), management did not express worries about the economy. Firm believes Baidu's slower growth is partially due to losing market share to Taobao.com, whose strengths include private company status, abundant cash, strong brand, high traffic, and sizeable sales force. Citi foresees more slowdown in 2009 due to Baidu expanding advertiser cleanup from the medical sector to other areas in response to the recent negative coverage by CCTV, China's dominant TV station.
Citi cuts their 4Q08 revenue estimate to reflect the new guidance, and lowered '09 and '10 revenue/EPS estimates by around 10% on economic concerns.
China Call: Citi recently turned negative on BIDU, downgrading it to Sell on Nov. 19th. The stock is down about 70% year-to-date and trading on 19x forward P/E. Currently analysts are divided on BIDU: Eight rated it Buy/Outform, five rated Hold/Neutral, and two rated Sell/Underperform.
Firm notes Baidu has never missed guidance since its IPO back in Aug. 2005. They found it alarming that Baidu cited economic concerns as a reason for lowering guidance, because during two very recent conference calls (Oct 22nd and Nov 19th), management did not express worries about the economy. Firm believes Baidu's slower growth is partially due to losing market share to Taobao.com, whose strengths include private company status, abundant cash, strong brand, high traffic, and sizeable sales force. Citi foresees more slowdown in 2009 due to Baidu expanding advertiser cleanup from the medical sector to other areas in response to the recent negative coverage by CCTV, China's dominant TV station.
Citi cuts their 4Q08 revenue estimate to reflect the new guidance, and lowered '09 and '10 revenue/EPS estimates by around 10% on economic concerns.
China Call: Citi recently turned negative on BIDU, downgrading it to Sell on Nov. 19th. The stock is down about 70% year-to-date and trading on 19x forward P/E. Currently analysts are divided on BIDU: Eight rated it Buy/Outform, five rated Hold/Neutral, and two rated Sell/Underperform.
Sohu.com (NASDAQ:SOHU): JP Morgan "Cautiously Optimistic" after Meeting Management
JP Morgan out cautiously positive on Sohu.com (NASDAQ:SOHU) following meetings with co's management. Firm says they came away believing 4Q08 outlook remains solid and initial '09 budget commitment is on the high-end of market expectations.
Firm also believes advertisers will allocate minimal budget to guarantee key ad inventories, while leaving part of their budget to be decided as the year progresses. Firm projects initial budget allocation in 1Q09 to go up 15% YoY for Sina (NASDAQ:SINA) and Sohu (NASDAQ:SOHU). Their conversations will institutional investors show major investors are epxecting online brand ad market to grow 10-15% YoY. In addition, new games Jian Xian and Duke of Mountain Deer will start contributing revenues in 2H09.
JPM retains their Overweight rating, but warns online advertising stocks may still trend down due to concerns about 2009 ad spending.
China Call: Yahoo! Finance shows the Street is expecting total revenue to go up 23% YoY in '09, and EPS to rise 20%. SOHU is down 19% year-to-date, but is among the top-10 performers out of 100+ Chinese ADRs.
Firm also believes advertisers will allocate minimal budget to guarantee key ad inventories, while leaving part of their budget to be decided as the year progresses. Firm projects initial budget allocation in 1Q09 to go up 15% YoY for Sina (NASDAQ:SINA) and Sohu (NASDAQ:SOHU). Their conversations will institutional investors show major investors are epxecting online brand ad market to grow 10-15% YoY. In addition, new games Jian Xian and Duke of Mountain Deer will start contributing revenues in 2H09.
JPM retains their Overweight rating, but warns online advertising stocks may still trend down due to concerns about 2009 ad spending.
China Call: Yahoo! Finance shows the Street is expecting total revenue to go up 23% YoY in '09, and EPS to rise 20%. SOHU is down 19% year-to-date, but is among the top-10 performers out of 100+ Chinese ADRs.
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