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May 08, 2008

News Corp Operating Income Up 16%

News Corporation reported a confusing set of earnings figure. On the call, management said that adjusted EPS were 30 cents vs. the reported figure o 91 cents. The 91 cents included a $1.7 billion gain while the 30 cents assumes a tax rate of 37%. Consensus was 32 cents so it looks like a miss but I think the tax rate is too high so let's call it inline on EPS.

Revenues exceeded expectations by $100 million at $8.75 billion. Cable Networks and to a lesser extent Newspapers provided the upside, offsetting big miss at the impossible to model Filmed Entertainment segment.

Operating income grew 16%, ahead of expectations for 11%. For me, this is the key metric. Television provided almost all the upside as the Fox Network more than doubled, the TV stations grew 12%, far ahead of the industry, and MyNetwork TV losses fell. Cable Networks also contributed to the operating income surprise as some the revenue gain flowed through. Cable networks would have been even better without the pressure form expenses for political coverage at Fox News....

........Overall, the call was cautious. I'd even call it defensive. The numbers are fine but this was no blowout like Disney and analysts and investors are frustrated by the poor stock price action, concerns over momentum in certain businesses, and the overall strategic direction of the company.

Management tired to get out ahead of questions by devoting time to Dow Jones and MySpace prior to Q&A. Murdoch made a pretty good case that DJ is a good deal. It is worth noting that adjusted for deal expenses, DJ had 16% operating income growth, a damn impressive figure for a newspaper company.

Peter Chernin addressed MySpace. He confirmed the revenue guidance reduction from $ 1 billion to $900 million but insisted that the business is healthy and is way under earning on operating income because of a proactive decision to reinvest the still huge revenue growth of more than 50%. I don’t think his remarks will squelch the controversy which has become a real problem for NWS shares. The asset is clearly worth $3-4 per NWS share but it produces less than $100 million in operating income which capitalizes it less than $1 billion in the stock price given the multiple. Think of it like AOL except that it is growing fast and is the dominant position in its niche.

Full year guidance for mid teens operating income growth excluding the DJ benefit was confirmed but I find that a bit weak given that YTD the growth rate is about 19%. The implication is for a greater than expected slowdown next quarter. This did not come up on the call which surprised me.

The strategic questions remain. Even if investors come around to accepting that DJ is a good deal the decision to aggressively pursue Newsday remains puzzling. The $100 million operating profit boost at the combined Newsday/NY Post is probably realistic but once that is done slow growing newspapers will just be a larger part of the mix, potentially penalizing the valuation through a lower multiple.

Overall, I think NWS shares should trade up slightly on the results and conference call. There was worry that things could be worse and getting weaker. That does not appear to be the case. However, I am getting frustrated with the shares. The fact that everyone else seems to be as well provides comfort. Sentiment is poor. The next move is more likely to be an improvement. I'm staying long.

Posted by Steve Birenberg at May 8, 2008 06:44 PM in