What's new News Corporation's second-quarter results comfortably exceeded market expectations, with normalised net income up 5 per cent and earnings per share (EPS) jumping 13 per cent.
The powerhouse cable network division posted another stellar performance, rising 7 per cent off an already impressive base to $US945 million ($914 million). It now accounts for more than 60 per cent of the group's earnings.
The much-maligned free-to-air television division also registered strong growth, up 19 per cent in the quarter to $US224 million.
On the negative side, the Italian satellite pay TV broadcaster, Sky Italia, turned in a loss of $US20 million (versus a $US6 million profit a year ago), as it lost 28,000 subscribers and ramped up programming investments to stem the tide.
Filmed entertainment saw earnings decline 3 per cent to $US383 million.
Outlook The solid quarterly result was partly overshadowed by a cut to News Corporation's operating earnings growth guidance for the full year, from "high single to low double digit" to a "mid-to-high single digit" percentage gain.
While disappointing, the magnitude of the downgrade was not material.
Furthermore, one of the main causes of the downgrade was the structural problems afflicting its Australian newspaper assets — no longer a surprise to anyone.
What we are focused on, and remain attracted to, is News Corporation's diverse portfolio of leading electronic media content assets, most of which demonstrate either very strong growth outlook (the cable-network division) or remarkable resilience (film, free-to-air TV).
Importantly, there are plenty of catalysts for the market to reappraise the underlying value of these assets, as the proposed split of the print businesses into a separately listed vehicle remains on track for mid-2013.
Price While the stock price slumped 4 per cent on the results day, due to market disappointment over the cut in earnings guidance, it has more than recovered since then. Over the past six months, the stock has surged 23 per cent; for 12 months it is up 53 per cent — easily outperforming the overall market.
Worth buying? The downgrade in News Corporation's earnings guidance for the full year was disappointing. However, its magnitude was immaterial and its importance pales in comparison with the continuing strong growth of the cable network division and the remarkable resilience of the film and free-to-air TV assets.
The company's balance sheet remains robust (gearing of only 30 per cent and an interest cover of six times), notwithstanding $US6 billion in stock repurchases over the past eight months, with another $US4 billion left in the buy-back program.
While the stock is trading at more than 16 times fiscal 2013 consensus EPS estimates, this quickly drops to less than 14 times the following year, due to the strong earnings growth outlook. Consequently, we believe the stock is worth buying at current levels.