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May 06, 2009

News Corporation: Dismal Results But Rupert Less Bearish

News Corporation reported dismal 3Q09 earnings as expected. Revenues were light of expectations but EPS were in line after adjusting for several large, one-time items. In the reported numbers, the story is the collapse in profitability at Television (operating income -99%), newspapers (-97%), Sky Italia (-35%) and book publishing (from profit to loss).

There is some good news as Cable Networks beat expectations with a revenue gain of 12% and a 30% increase in operating income. All the major cable network companies that have reported so far matched or exceeded expectations. NWSA benefited from affiliate fee and ratings increases at Fox News and a turn to profits at the Big Ten Network.

Also on the positive side is dramatically improved results at Filmed Entertainment. TV syndication helped but the real story was a return to producing hits at the movie studio. The summer lineup looks good and should build on the momentum at the profit level not just the box office. Wolverine, Night at the Museum 2, and Ice Age 3 are the summer releases. Importantly, these are the type of titles where DVD sales are holding up relatively well.

NWSA is on a June fiscal year so the fact they are maintaining guidance of -30% operating income growth does not mean much. However, it does suggest the recent pattern of stabilizing fundamentals for a broad range of media business is happening at NWSA as well. It looks to me like guidance would have come down were it not for the positive surprises at Cable Networks and Filmed Entertainment but that is not a problem as the whole point of being a diversified media conglomerate is having some good businesses that are working at all times.

In prior NWSA write-ups I have commented that Rupert Murdoch has been incredibly bearish on the economy on the impact on NWSA. Thus, his comments on the call that "the worst is over" and that "in some businesses revenues are beginning to look healthier" are noteworthy. The dramatic change in Rupert's tone will likely be enough to drive NWSA shares up in their initial response to the results.

Comments like these from Viacom and Disney and good domestic ad growth at Time Warner and Discovery Communications has fueled a huge rebound in advertising sensitive media stocks. Nothing reported by NWSA nor comments on business trends upset the new view that media businesses, particularly advertising, is stabilizing.

Disclosure: Time Warner is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

Posted by Steve Birenberg at May 6, 2009 04:42 PM in NWS