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February 04, 2008

News Corp Earnings Preview: Expect Good News

I anticipate a strong quarter from News Corporation after the close on Monday and a positive reaction from the market. The stock jumped 3% on Friday as investors began to look ahead to earnings and considered the impact of the Yahoo-Microsoft deal on MySpace. I think plenty of upside remains in the near-term and long-term and would be long heading into the report as a trade and an investment.

NWS is expected to report 2Q08 results of 27 cents on revenues of $8.24 billion. EPS are expected to grow by 4$ on a 5% increase in revenue. The all important operating income line is expected to grow by 9-10%. This will be the lowest growth of the year for operating income with a substantial acceleration expected in the next two quarters. It is this acceleration which is expected to continue in the company's 2009 fiscal year starting July 1st that attracts me to the shares.

It is always best to analyze the big entertainment conglomerates on a segment basis. Here is a breakdown of expectations with brief highlights for the most important segments. In parentheses is the estimated revenue growth and operating income growth (rev %/op inc %)....

Cable Networks (+19%/+13%): Rising affiliate fees at Fox News and a strong advertising market will drive growth but margins will be pressured by developments costs at Fox Business Channel and the Big Ten Network. Winding down of development costs will lead to accelerating growth in this segment in future quarters.

Newspapers (+7%/-2%): Accelerated depreciation and other expenses related to a new headquarters building in the UK will pressure margins. Currency translation will help. Dow Jones closed with a few weeks left in the quarter and may distort the numbers. Newspapers are poised for accelerating growth as the headquarters impact disappears. I think DJ may prove less dilutive than expected which could also help this segment in 2008.

Other/Fox Interactive (+20%/$24 million profit versus breakeven): My Space should see a significant swing of $50 million in profits which will be partially offset by increased expenses to develop TV stations in Eastern Europe. Google mentioned some issues with social networking sites on its conference call but I am not sure if that flows through to MySpace results or not. My confidence about monetization of MySpace increased over the past few months which is a major reason I decided to purchase NWS.

Filmed Entertainment (-11%/-18%): Tough comparisons in box office and DVD will cause a big drop in this segment that is dragging down the overall growth rate of the company this quarter. Last year, there were two big holiday films vs. just one this year. In DVDS, last year had three strong selling titles versus just one this year. DVD comps are compounded by a weaker and crowded DVD market this year.

Television: (+2%/+65%): Much improved profitability at FOX Network due to strong ratings, a healthy advertising market and the removal of a low margin baseball contract are the reason for the highly favorable operating income comparison. Reduced losses at MyTV will also help. The TV stations face a tough comparison due to political spending a year ago. The impact of the writer's strike is anybody's guess.

Satellite (+20%/ profits vs. losses): Operating leverage is working in favor of SkyItalia now that the business has turned around and sub growth remains strong. Subs should grow by at least 100,000 and losses of $12 million a year ago should turn to profits of $40 million this year. Plenty of upside remains as margins are under 5% this quarter. SkyItalia will be a significant growth drive in 2008 and 2009...

Posted by Steve Birenberg at February 4, 2008 07:47 AM in NWS