Posted on Friday, February 8th, 2013 | In Stocks to Watch
News Corporation’s (NWSA) second-quarter fiscal 2013 earnings of 44 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 12.8% from 39 cents earned in the prior-year quarter on the back of healthy growth across Cable and Television operations coupled with improvement witnessed at the Publishing division. However, SKY Italia remained a drag on the quarter. Share repurchase activity also provided cushion to the bottom-line by 3 cents a share.
Including one-time items, News Corporation posted quarterly earnings of $1.01 per share, which more than doubled from 42 cents delivered in the year-ago quarter.
Recently, Time Warner Inc. (TWX), one of the peers of News Corporation, posted fourth-quarter 2012 adjusted earnings of $1.17 per share that surpassed the Zacks Consensus Estimate of $1.10 and surged approximately 24% year over year.
News Corporation, a diversified media conglomerate, stated that total revenue rose 5% year over year to $9,425 million on account of revenue growth across Cable Network Programming (up 18% to $2,559 million), Television (up 1% to $1,532 million), Publishing (up 1% to $2,149 million) and Filmed Entertainment segments (up marginally by 0.2% to $2,067 million), partially offset by declines at Direct Broadcast Satellite Television division (down 6% to $890 million). The Other segment’s revenue surged 48% to $228 million. Total revenue also came ahead of the Zacks Consensus Estimate of $9,263 million.
Total adjusted segment operating income increased 5% year over year to $1,659 million during the quarter. Management now projects mid to high single-digit growth rate in operating income for fiscal 2013, down from high single to low-double digit growth rate forecasted earlier, as News Corporation anticipates lower-than-expected performance from SKY Italia, the Fox Broadcast Network and the Australian newspapers.
Management anticipates channels businesses to deliver healthy earnings growth on the back of a sustained increase at Cable Networks and growth at international channels, as well as increase in advertising and affiliate revenues buoyed by FOX News, Regional Sports Networks and FX Network.
The company is also focusing on enhancing its portfolio of regional sports channels to strengthen the company’s Fox Sports Media Group’s position in the lucrative sports entertainment business, where it competes with Walt Disney Company’s (DIS) sports coverage network, ESPN.
In order to bolster its position in regional sports television business, News Corporation acquired the regional sports network, Sports Time Ohio and a 49% stake in the Yankees Entertainment and Sports Network in Dec 2012. In Nov 2012, the company acquired the remaining 50% stake in ESPN STAR Sports, which was a joint venture with The Walt Disney Company. Later, News Corporation changed its name to Fox Star Sports Asia. The company is also set to launch Fox Sports Japan.
The company’s list of acquisitions also includes Eredivisie Media & Marketing (acquired 51% stake) and Consolidated Media Holdings Ltd. In Jan 2013, News Corporation increased its stake in Sky Deutschland to 55%.
Operating income at Cable Network Programming jumped 7% from the prior-year quarter to $945 million, boosted by revenue growth, reflecting an escalation of 9% in the domestic cable channels’ operating income, buoyed by growth across the Regional Sports Networks (RSNs), FX Network, Fox News Channel and National Geographic Channels, partly offset by higher programming expenses. Contribution from international cable channels rose 3% gaining from robust operating income growth at the non-sports channels at Fox International Channels (FIC) and Star.
At the domestic cable channels, affiliate revenue grew 13%, signifying increased rates across all networks, with growth primarily driven by Regional Sports Networks and the Fox News Channel. Advertising revenue climbed 8%.
At the international cable channels, affiliate revenue grew 42%, reflecting improvement at FIC and STAR, and gain from the inclusion of Fox Pan American Sports and Fox Star Sports Asia, partly mitigated by the strong U.S. dollar. Advertising revenue surged 29%.
Filmed Entertainment’s operating income edged down 3% year over year to $383 million. The quarter marked the theatrical release of Taken 2 and Life of Pi globally, and home entertainment performance of Ice Age: Continental Drift. The year-ago quarter benefited from home entertainment performances of Rio, Rise of the Planet of the Apes and X-Men: First Class, globally.
Television segment’s operating income grew 19% year over year to $224 million on the back of an over twofold rise in retransmission consent revenue and higher local advertising at the Fox Television Stations, benefiting from political advertising revenue, partially offset by fall in national advertising revenue due to soft ratings at the Fox Broadcast Network and 3 lesser World Series games this year.
Direct Broadcast Satellite Television or SKY Italia posted a segment operating loss of $20 million, demonstrating a sharp decline from an operating income of $6 million in the year-ago quarter due to increased programming costs and the strong U.S. dollar. Management anticipates to lower cost base by $200 million over the period of 2 to 3 years.
SKY Italia ended the quarter with a subscriber base of 4.83 million, representing a net reduction of 28,000 subscribers on account of the sluggish economic environment in Italy.
Publishing segment reported an operating income of $234 million, up 7% from the prior-year quarter. News Corporation hinted that rise in operating income was attributed to higher contributions from the U.K. newspapers and the buyout of Thomas Nelson, Inc., a Christian book publisher. This was partially offset by waning advertising revenue at the Australian newspapers.
The Other segment posted an operating loss of $186 million compared with a loss of $191 million in the prior-year quarter.
Other Financial Details
News Corporation ended the quarter with cash and cash equivalents of $7,806 million, total borrowings of $16,457 million, reflecting debt-to-capitalization ratio of 36.9%, and shareholders’ equity of $28,152 million, excluding non-controlling interests of $853 million.
On May 9, 2012, the company’s board of directors approved a share buyback program that raised the repurchase authorization to $10 billion from $5 billion. Through Feb 5, 2013, News Corporation bought back approximately $6.3 billion of shares at a price of $19.13 per share.
News of the Split
The major news regarding News Corporation that hit the headlines was its decision to split into two separate publicly traded publishing and media and entertainment entities. The split is expected to be concluded by the year end.
The Publishing Company will comprise publishing businesses, education unit and the integrated marketing services business. On the other hand, Entertainment Company will include cable and television assets, filmed entertainment, and direct satellite broadcasting businesses.
Currently, News Corporation holds a Zacks Rank #3 (Hold). Other stock to consider in the media sector is Lions Gate Entertainment Corp. (LGF), which holds a Zacks Rank #1 (Strong Buy) and looks promising.
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