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February 05, 2008
Good News Corp
News Corporation reported excellent third quarter beating consensus estimates on EPS, revenue, and operating income. Strength was virtually across the board with every segment beating estimates on the operating income line. Topping off the good news, operating income growth guidance was raised from low teens to mid teens.
On the call management addressed the two most pressing short-term issues for the stock. First, Rupert Murdoch said that NWS is "definitely not making a bid for Yahoo." Just to be extra clear, COO Peter Chernin repeated Rupert's comment. Second, Chernin said that Google should not have been surprised by the profitability of their MySpace deal as it was on target with initial projections.
The only question left for the bulls is that even the higher guidance assumes a significant slowdown in the second half of the company's fiscal year. Halfway through FY08, operating income has grown 24%, yet the upwardly revised guidance is only mid teens. The math suggests that implied growth in 2H08 is upper single digits. Personally, I think they are just being exceptionally conservative in light of the continuing uncertainty about the US economy which seems particularly worrisome to Rupert Murdoch.
The bottom line is that NWS will likely beat and raise again next quarter. The shares deserve to trade much higher and the just reported quarter and commentary should provide an immediate boost. NWS is the best positioned large cap media stock for long side investors over the next year.
In 2Q08, NWS reported adjusted EPS of 32 cents, comfortably ahead of the consensus of 27 cents. Revenues of $8.59 billion beat consensus of $8.24 billion. Operating income grew by 24% vs. expectations of 9% growth. Every segment but Other comfortably beat its operating income estimate. Revenues were better than expected in Cable Networks, SkyItalia, Newspapers, and Other. In Other Fox Interactive Media, which includes MySpace, had revenue growth of 87% and showed an operating profit of $47 million vs. a loss of $11 million a year ago....
....Growth drivers in the quarter included exceptional results in Television where strong ratings and advertising at Fox Network led the profit boost. Filmed Entertainment was down year over year but results were significantly better than expected driven by higher than expected DVD sales which led to favorable shift in margins. SkyItalia continued to show operating leverage inherent in its fixed cost model now that subscriber growth has accelerated. Newspapers got a boost from surprisingly strong 7% advertising growth in Australia. Foreign currency translation also gave the Newspapers a boost such that the segment had 15% operating income growth vs. low single digit consensus expectations.
Looking ahead, management noted that there are several near-term growth drivers. At the studio, the theatrical success of Alvin and the Chipmunks and Juno will drive DVD sales. Both films had low production costs and will be very profitable. TV stations will benefit from political advertising which will really ramp as the November election approach. Newspapers will begin to see the savings of the new plant in the UK in the June quarter. This has been a drag in 1H08. MySpace will continue to ramp thanks to the guaranteed revenues from Google and initial success with hyper targeting of display ads.
It is rare to find a company as diversified as NWS firing on all cylinders while also absorbing significant investment spending. This scenario is great for investors as the investment spending should extend the growth profile of the company. Fox Business Channel, the Big Ten Network, TV stations in Turkey, Poland, and Serbia, Dow Jones, and Fox Interactive are all potential contributors to long-term growth that are a drag on current earnings growth. Nevertheless, operating income growth in 2008 and 2009 should be in at least the upper teens. NWS shares are an exceptional value at current value prices.
Posted by Steve Birenberg at February 5, 2008 01:50 PM in NWS
THE OVERALL MARKET TOOK A HUGE HIT TODAY.THE MEDIA STOCKS INCLUDING CETV IN PARTICULAR ALSO SHOWED VERY LARGE DROPS. WAS ANYTHING SPECIAL GOING ON WITH CETV OR WAS THE $7 DROP JUST REFECTIVE OF THE EMERGING MARKETS?
DO YOU THINK THE DROP TODAY IS MORE REFLECTIVE OF A DEEPENING AND WORSENING RECESSION OR ARE WE IN THE VERY BEGINNING OF THE BOTTOMING PROCESS?
THE MARKET ,TO ME,WITH ITS CONTINUING DECLINES DESPITE AGGRESSIVE FED RATE CUTS,CERTAINLY APPEARS SCARY AND IS UNFORTUNATELY REMINISCENT OF 2001 .WHAT ARE YOUR THOUGHTS IN THIS REGARD?
CETV got rocked because of its role as a proxy for the emerging markets. They got killed today. CETV had been strong especially yesterday. The news from Ukraine announced today is superb. I'll have a post up on the main blog in the AM.
Disney reminded us after the close that some media companies can cope quite well echoing superb results from News Corp.
I do think the recession now looks like it might be deeper than expected. However, I still think the fact the Fed is on the case will limit the downside in stocks. I think a retest of the lows will hold at least for now because falling rates are stimulative to the exact parts of the economy (housing and consumer) that most need it.
Keep your helmet on though as the market will remain a wild ride. Make sure what you own is going to come through economic weakness OK. Don;t be afraid to play the short side if you have the ability. This will be a trader's market that will be difficult to make profits in for the at least the next few months.
Posted by: Steve at February 5, 2008 09:20 PM