News Corp: Interim result 2013
Recommendation
News Corp recently announced its results for the quarter and half-year ended 31 December 2012. As usual, we skipped the headline numbers and headed straight for the divisional results that will dictate most of the stock’s long-term returns.
In the second quarter, the important Cable Network Programming business generated an 18.4% increase in revenue to US$2.6bn. This translated into lower earnings before interest and tax (EBIT) growth, up 7.1% to US$945m and disappointing in the context of the 20%-plus growth of recent years. The slower growth in earnings was predominately caused by higher programming expenses, particularly sport programming, with new contracts for cricket (Star India), UFC mixed martial arts and US college football. We have been preparing for a slowdown in earnings growth from cable network programming for some time, but don’t think this quarter’s earnings growth is prophetic – sports programming cost increases tend to be lumpy in nature. We’ll watch costs closely, but further revenue growth should ‘fall through’ into further EBIT growth. We expect a few more years of annual EBIT growth exceeding 10%, hopefully 15%.
3-months to 31 December | 2012 | 2011 | Change (%) |
---|---|---|---|
Cable Network Programming EBIT (US$m) | 945 | 882 | 7 |
Filmed Entertainment EBIT (US$m) | 383 | 393 | -3 |
Television EBIT (US$m) | 224 | 189 | 19 |
Direct Broadcast Satellite EBIT (US$m) | -20 | 6 | N/A |
Publishing EBIT (US$m) (adj.) | 290* | 305* | -5 |
*Adjusted for several one-off charges, underlying numbers presented here. |
Revenue of US$2.1bn and EBIT of $383m from the Filmed Entertainment division was almost line ball with the same quarter in 2011. Higher movie revenue from successful releases Taken 2 and Life of Pi was offset by lower television production revenue. In other important divisions, EBIT from the television broadcasting rose 19% to US$383m and publishing fell 5% to $290m on an underlying basis. Directors declared an interim dividend of US8.5 cents per share (both classes), unchanged from last year.
Unlike the dividend, the share price of News Corp has risen sharply recently – up about 30% over the past six months and 17% since our last review on 8 Nov 2012 (Hold – $24.10) - presenting a conundrum for the discerning value investor. The stock has now eclipsed the Take Part Profits price of $25 in our last recommendation guide. But our last sum of the parts valuation table is looking increasingly conservative – even our ‘bullish’ valuation for Cable Network Programming, of US$30bn, is only about 8 times estimated 2013 EBIT, which is a low multiple for a star performer. We’ll revisit our valuation in the near future, and will in the meantime preference giving the stock leeway over selling too cheaply. We've adjusted prices in the recommendation guide accordingly. HOLD.
Note: The Growth portfolio owns News Corp non-voting A-class shares.