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.

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.

News Corp Catches A Downgrade

News Corporation shares traded down 4.6% on Monday in response to a downgrade from Bernstein Research analyst Michael Nathanson. Nathanson lowered his rating from outperform to market perform, cut his price target from $24 to $21, and lowered his earnings estimate by 7% for FY08 and 4% for FY09. Prior to this downgrade, Nathanson shared my view that NWS shares were substantially undervalued due to the company having the highest operating income growth in big cap media and the best potential to beat earnings estimates in 2008 and 2009.

NWS shares have been under pressure recently due to the fact that Fox Interactive Media, composed mostly of MySpace, is going to miss its FY08 revenue target by up to 10%. NWS shares suffered another setback last Friday when General Electric indicated that NBC Universal was under plan due to weakness in local TV advertising. GE also said that after holding up well in January and February, national ad trends weakened a bit (from very good levels) in March. Further comments that online advertising was feeling economic pressure only added to worries about MySpace.

This downgrade hits me hard because it is well reasoned....

....Between MySpace and traditional media advertising exposure, NWS suddenly is facing the possibility of decelerating operating income growth and negative EPS surprises. And the fact that the shares are cheap at under 15 times calendar 2008 EPS is not a panacea because as I pointed out last week, traditional media drives NWS earnings but MySpace drives the multiple. Both had been tailwinds. It is possible that both are turning into headwinds.

MySpace Miss Pressures News Corp

Controversy about monetization of revenue and profits at MySpace has held back shares of News Corp so far this year despite outstanding December quarter earnings, increased guidance for the fiscal year ending this June, and commentary from Rupert Murdoch and other senior executives stating that so far the company is feeling any impact from the recessionary conditions in the US economy.

The controversy over MySpace began when Google reported its most recent earnings and said that it was having trouble monetizing social networking traffic. Last week, the controversy heightened when several news outlets reported that Fix Interactive Media, of which MySpace is by far the largest component, would miss its fiscal year revenue target of $1 billion by up to 10%.

Analysts largely took the news in stride by noting that the shortfall would not amount to more than a penny a share and less than 1% of operating income. Most analysts left their estimate of MySpace's value unchanged at $3-4 per NWS share unchanged.

While I remain bullish on NWS shares, I think analysts are a bit too sanguine. I have little doubt that if MySpace were sold it would fetch at least what analysts expect. However, any reduction in the long-term growth expectations for MySpace would have an abnormally large impact on NWS's EBITDA or EPS multiple.

NWS Corp is a strong company with excellent operating momentum. Despite concerns about MySpace and the company's exposure to economically sensitive advertising, the shares have slightly outperformed the market this year, falling just 4.5%. This is a testament to superb operating momentum in the company's broad array of businesses including SkyItalia, newspapers (yeah, your read that right even if it is cost driven), and cable networks.

I still think the shares should be trading in the $24 range, providing more than 20% upside, but racing that target will be difficult until positive trends and perception re-emerges for MySpace. I plan to be patient.

News Corp Looking At Yahoo?

News Corporation has sat out this week's rally, falling about 2%. I think the problem is fear over a bid for Yahoo. These fears persist despite very strong denials of interest from Rupert Murdoch and Peter Chernin on the quarterly conference call just ten days ago. The latest rumor is some sort of joint bid whereby News Corp puts Fox Interactive and a pile of cash into a new company that also contains Yahoo and another pile of cash dumped in by a private equity firm. News Corp would own a piece of the new entity, maybe around 20%. The new Yahoo/MySpace entity would outsource search to Google which would provide an immediate bump to operating income given that Google search monetizes at a substantial premium to Yahoo search.

Assuming this is a real deal, an assumption I would not make, and that the Google search deal would pass regulatory muster, another assumption I would not make, I have mixed feelings....

....On the one hand News Corp's value creation in Fox Interactive Media would be realized. Most valuation models for News Corp use EPS or EBITDA multiples. Since Fox Interactive Media, particularly MySpace, is way under earning relative to its private market value, the models are massively undervaluing News Corp.'s web assets. I've seen estimates that the overlooked value could be as much as $4 per share, not exactly small change on a $20 stock.

On the other hand, I have become much more positive about the ability of MySpace to monetize its traffic. The Google search deal is guaranteed for another two plus years. Display advertising is definitely ramping thanks to the new hyper targeting initiatives.

The question is whether MySpace can ever generate enough operating profit to justify the multibillion dollar private market value that exists today. In other words, would you rather have 20% of a larger entity with recognizable value today or 100% of an asset with a potentially significant higher value in five to ten years? Of course, this assumes that Yahoo is worth something significant today and that it will grow in the future.

I'm honestly not sure where I come down. If forced to choose, I'd take 100% of Fox Interactive. One thing I do know is that this is a sideshow to the momentum that exists across News Corp's asset base including the cable networks, SkyItalia, and MySpace. And that momentum is being hidden by heavy investments in the UK newspapers, Eastern European TV, Fox Business News, the Big Network and dilution form the Dow Jones acquisition.

The bottom line is that the Yahoo rumors are giving investors a great shot to buy News Corp cheap. Disney is up 2% on the year. News Corp is down 6%. Opportunity is knocking at News Corp.

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.

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...

News Corporation December Quarter Preview

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...

Why I Bought News Corporation

Back in July, I wrote a review of News Corporation for RealMoney.com outlining the bull case. The analysis remains relevant today so in light of the purchase of News Corporation shares for Northlake clients earlier this week, I am reproducing the article so you can learn more about this new holding….

I like News Corporation because it offers the fastest earnings growth among the mega cap media stocks but trades at the same P-E multiple as its peers on 2008 earnings. Furthermore, the company is active in M&A with a decent chance for a major transaction that would unlock value in MySpace. Since the Dow Jones (DJ) deal was announced, the shares have sat out the rally giving back gains made earlier this year. I think the weakness in the shares, down 10% since late May, has set up a great buying opportunity.

Some investors are concerned about the high price being paid for DJ and the strategic implications of the deal. However, I think they are overlooking NWS's recent announcements of asset sales (TV stations and Eastern European billboards) that will sell at similar premiums to DJ and finance half of the DJ deal. Additionally, the DJ deal represents just 10% of NWS market cap so I don’t view it as unusually risky even if it fails to offer the synergies that Rupert Murdoch must be expecting....

....Here is an overview of News Corporation's businesses based on 2008 estimates I compiled from a few of my favorite analysts:

Key assets include 20th Century Fox, the FOX TV Network and owned and operated TV stations, cable networks including Fox News and FX, Sky Italia, newspapers in the UK and Australia, and Fox Interactive Media which includes MySpace and is included in Other.

The bull case for NWS is pretty simple. As can be seen in the following table, NWS will have by far the fastest earnings growth among the megacap diversified entertainment conglomerates but the stock trades at the same multiple as the rest of the group:

Earnings growth began to accelerate last quarter with EPS gain 24%. June quarter earnings are expected to show again of at least 26%. The earnings growth is a combination of double digit top line gains, expanding margins, and the benefits of share buybacks. Key drivers of the earnings acceleration are Sky Italia, the cable networks, and MySpace. SkyItalia is the largest satellite TV provider in Italy. Multichannel penetration in Italy is low so there is plenty of room to grow. As subscriber growth continues margins are beginning to expand sharply. NWS has seen this movie before via its investments in satellite TV in Asia, England, and Latin America. The cable networks growth is being driven mostly by sharp increases in affiliate fees at Fox News. Recent deals reached with major cable operators like Time Warner (TWX) and Comcast (CMCSA) have tripled the monthly fee they pay NWS for each subscriber and bring the fee to levels long enjoyed by CNN. MySpace is benefiting from its multi-year deal with Google (GOOG) and additional monetization efforts on the heavily trafficked site.

NWS has the same combination of revenue growth, margin expansion, and share repurchase that investors have been rewarding at DIS which has risen 130% from the fall 2002 lows. NWS shares have enjoyed similar performance although the company has not had three years of consistent double digit operating income growth like DIS. Instead, I think that NWS share gains have been driven by the re-orienting of the asset portfolio toward higher long-term growth. Therefore, I think that as NWS replaces DIS as the fastest growing entertainment conglomerate the P-E multiple should expand driving significant further gains in the stock price.

One other factor supporting higher share prices is that the private market value of the company is well above current trading values if recent deal multiples are applied to the company's operations. NWS has a balanced mix of content and distribution assets that don’t seem likely to change much regardless of the outcome of the DJ takeover attempt. In fact, I think it is more likely that the asset base is rationalized via more divestitures like the TV stations, Eastern European billboards, and the DirecTV (DTV) divestiture in the deal with Liberty Capital (LCAPA). Next up could be a deal to merge MySpace into Yahoo! (YHOO) or something similar. Each of these deals simplifies NWS's capital structure and reaffirms underlying asset value making it easier for investors to reward the industry leading earnings growth.

News Corporation On A Roll

Looks like a real good quarter for News Corporation. Results for 1Q08 are ahead of expectations. This should be very comforting for shareholders as the year was supposed to backend loaded. Revenues grew 19%, well ahead of the 9% gain expected. The revenue upside translated to profits as operating income rose 23% vs. expectations for 14%. Guidance for low teens growth in operating income for the year looks awfully conservative given that some cost pressures evident in 1H08 will dissipate. I guess when Peter Chernin said that all businesses were above budget we should have listened.

It is hard to argue against News Corporation as a core media long. I'll be looking to buy shares in the next few days....

....Revenues of $7.1 billion were $500 million better than expected. As much as $350 million upside came form the move studio thanks to a strong summer box office performance led by The Simpsons Movie. Newspapers were a little better than expected on reveues while Other, which is mostly Fox Interactive was at least $100 million better than expected. There were no material shortfalls in revenue as far as the stock price is concerned.

Operating income of $1.047 billion are about $90 million, or almost 10% better than expected. Filmed Entertainment was the driver, accounting for almost all the upside. Sky Italia and Cable Networks also contributed meaningfully to the upside. Book Publishing looks a little low. Other losses improved but fell a little short given the upside in revenue. Ongoing investment in MySpace also held back results.

Cash continues to build and the DirecTV sales is still set to close soon. On the call, Rupert would not commit to an accelerated share buyback. This is a little disappointing but it seems impossible to assume that a large repurchase is not coming. Rupert did sya that the weak dollar makes acquisitions difficult given that his interest would be mostly outside the US.

Guidance was reaffirmed with a statement that "we are comfortable." I think that leaves upside. Some will complain that upside this quarter was largely form the movie studio and that is not worth paying for. I say that News Corporation is a conglomerate so we should n't complain about where growth comes from. The fact that Cable Networks and Sky Italia are also performing very well and MySpace and Newspapers will improve as the years goes leaves News shares in very good shape with more good earnings news to come in the next twelve months.

News Corporation Looking Good

News Corporation (NWS) reported a very solid fourth quarter to wrap up a great fiscal 2007. Revenue and EBITDA rose 9% and 19%, respectively, with revenue comfortably beating estimates and operating income in line. The composition of operating income will please investors, however, as Cable Networks and Fox Interactive Media (MySpace) comfortably exceeded expectations offsetting a major shortfall at the impossible to forecast Filmed Entertainment segment.

NWS also offered favorable guidance for 2008 calling for operating income growth of "low teens." The outlook is based on similar fundamentals to 2007 which means that Sky Italia, Cable Networks, and Fox Interactive Media will be the drivers. The guidance also has a nice cushion for growth in 2009 and beyond as NWS plans to absorb $340 million in investment spending in 2008 vs. $180 million in fiscal 2007 (in FY07, operating income was over $4.4 billion). Half of that investment is for UK newspapers and will go away in 2009. Additional investments will be made in the Fox Business Channel, the Big Ten Network, and Eastern European TV stations. Each of these businesses should offer growth after a year or two of investment.

4Q results and the 2008 outlook give me increased confidence in my bullish outlook for NWS. I expect to be a buyer of the shares in the near future.

Other highlights form the press release and conference call include...

Filmed Entertainment is off to a good start in 2008 with Fantastic Four, Live Free or Die Hard, and The Simpsons Movie all performing well at the box office. Each film will go through its profit windows during FY08.

My Space will more than double its revenues and profits in 2008 driven by a ramp in the Google deal and strength in advertising across the platform.

Cable Networks had a good upfront, especially for Fox News. International channels are growing rapidly and along with Fox News will drive 2008 growth similar to the 26% gain in 2007. Management used time on the conference call to discuss this segment feeling that it is underappreciated by investors.

Newspapers received little attention on the call. Results looked good on the service with revenues and EBITDA easily beating estimates. However, all of the strength is due to favorable currency as advertising and circulation revenues in the UK were negative and operating income in local currency only eked out a gain due to expense control.

A Deal Coming Between Telecom Italia and News Corp?

Today’s news that Telecom Italia plans to sell its mobile phone unit and focus on media investments reminds me that despite multiple compression and secular challenges, the media business is still viewed as sexy and seems to have an unblemished ability to draw wealthy investors. According to the Wall Street Journal Chairman Marco Tronchetti Provera has been “noting that media companies trade at significantly higher multiples than do telecom companies.” Having suffered through all the difficulties and poor performance for many media companies, I can only say that it is good to know it is worse elsewhere.

The Telecom Italia news also reminded me that my friend Cody Willard wrote on his Real Money blog last week that he was going long News Corporation (NWS, NWS.a). Rumors have been swirling for a few weeks that Telecom Italia and NWS were close to a media based deal although details are sketchy. News controls Sky Italia, the largest satellite TV company in Italy. I have been under the impression that Rupert may want to monetize Sky Italia so maybe the move to sell mobile will provide the liquidity to structure a deal.

I think Cody will be happy with his NWS long. I do not own the stock myself but I’d put it at the top of a list for potential media investments. Cody’s buy of NWS seems to be based largely on the MySpace acquisition. In addition to the growth boost, I think that he believes multiple expansion could come the way of NWS given its ownership of the very successful internet site.

I think some multiple expansion is possible but the real reason to own NWS is....

because its traditional media businesses are driving growth. Similar to Disney (DIS), NWS has most of its businesses hitting growth targets simultaneously as its TV stations, cable networks, movie studio, TV network, and international operations are all prospering at present. Media investors have shown a willingness to bid up companies that are driving growth in their core businesses. Consequently, I view MySpace as an incremental positive in the NWS story not the primary mover.

Lastly, with two teenage kids I am quite familiar with the MySpace phenomenon. And in the near-term, I have little doubt that NWS can keep the momentum rolling. However, I do share Cody’s caution when he states that NWS “will have to be careful not to alienate the millions of users who make up its base as the site becomes clearly more commercial.” Social networking is far different than dial-up internet but AOL was once viewed as the place to be for teens but the same teens that are driving MySpace could change their mind if MySpace loses its cool factor as more and more companies use the site for marketing and NWS Corp puts the almighty dollar at the center of its strategy.