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May 05, 2009

News Corporation Earnings Preview: Is This The Bottom?

News Corporation will report a dismal March quarter. EPS and EBITDA will declines 50% or more. The good news is this should be the worst quarter this cycle. That is certainly what investors seem to be saying as NWSA shares have rallied 84% off their March lows including 20% since media earnings season kicked off last week.

Consensus for the third quarter of 2009 (June fiscal) calls for EPS of 16 cents on revenue of $7.71 billion and EBITDA of around $1.1 billion. Estimates have fallen sharply over the past three months. At the time of the last earnings call, consensus was 25 cents for the March quarter and as recently as 30 days ago the figure was 18 cents. The sharp drop in estimates supports the idea that the stock now reflected the worst at what may be the bottom of the cycle.

Reports from Time Warner, Viacom, and Discovery Communications have encouraged media investors and supported the rally in NWSA which is one of the most cyclical big media companies. In particular, better than expected or stabilizing advertising trends at cable networks has improved the mood. NWSA stands to benefit via its ownership of Fox News, FX and other cable nets. This is the only area where I think the company could produce a positive surprise at the segment level.

Comparisons will be brutal in broadcast TV, TV stations, and newspapers. Advertising trends will likely be down 20-40%. Margins will contract leading to operating income falling 50% plus. Sky Italia, one the NWSA's long-term growth engines also had a tough quarter due to currency, economic headwinds, and promotion timing issues.

MySpace ha recently had management changes so the focus will be looking ahead to possible new monetization strategies. Estimates for ad growth at MySpace range from low single digit negative to up 5-10%.

Finally, as usual, strategic direction of NWSA will be a focus of the Q&A. Concerns are heightened following the departure of Peter Chernin, the very well regarded and long-time COO. Rupert Murdoch's deal making has always been a worry and ill-timed forays into additional newspaper exposure have heightened investor concern, especially with Chernin now gone.

Posted by Steve Birenberg at May 5, 2009 09:31 AM in NWS