News Corp: Interim result 2016

If you own News Corporation, you'll know it's a strange beast. A large portion of its earnings come from its News and Information Services division, a business where 'revenues and earnings are likely to continue declining over time', as we said in News Corp on the Move from 11 Jan 16 (Buy – $18.53).

Unfortunately, in News Corporation's half-yearly result (to 31 December 2015), earnings declined rather quickly. EBITDA fell 25% as weakness in print advertising accelerated. Management has implemented another cost-cutting program, with News Corp Australia taking the brunt.

It wasn't much better elsewhere. Book Publishing was also weaker, with EBITDA falling 25% because 2015 was such a strong year and a surprising industry-wide downturn in e-book sales.

It's important to remember that News Corp reports in US dollars, so the performances of the company's remaining businesses – which are mainly based in Australia – look much worse than they really are. While EBITDA from the Cable Network Programming division (Fox Sports) fell 22% in the half, for example, it was only a 10% fall in 'adjusted' terms (which removes the effect of currency fluctuations).

Foxtel grows revenue

Foxtel's 30% decline in first-half earnings was a combination of Aussie dollar weakness and one-off costs. While average revenue per user fell by around 5% as unbundling took effect, Foxtel's total quarterly revenue actually rose 5% due to higher subscriber numbers.

Despite the doomsayers, Foxtel isn't dead in the water. Management reiterated that Foxtel should report an increase in EBITDA for the full year in Australian dollar terms. That implies an improvement in the second half.

Earnings growth from Digital Real Estate would have also been stronger – 24% compared to 14% – had the Aussie dollar not got in the way. REA Group's earnings grew 29% in Australian dollars, for example. Move once again produced outstanding revenue growth, up 35% in the second quarter, with management reiterating the business should be profitable in 2016.

With the market so focused on earnings rather than assets, value really is becoming compelling at this price. Taking News Corp's stake in REA Group at market value, the share price is implying the remaining divisions are worth the 'low' values in our sum-of-the-parts valuation. That suggests Move is being valued at zero, with the remaining divisions at between three and six times EBITDA.

Diversified business

Our 'low' value for News and Information Services is just $US1.8bn, for example, but this is a hugely diversified business. The Wall Street Journal, just one of the division's assets, could probably be sold for at least $US1bn. The Wall Street Journal is only one of Dow Jones' assets, for which News Corp paid $5.6bn in 2007.

Friday's result might have been poor, but it wasn't as bad as it looked. Some of the issues look temporary, not least the currency headwinds and the downturn in e-book sales. The News and Information Services business will remain problematic, but the implied $1.8bn valuation looks way too low.

News Corp isn't for everyone, with its structural challenges, its miserly dividend and Rupert Murdoch's editorial policies. What we can say though is that the stock is excellent value.

It's now down 6% since News Corp on the Move from 11 Jan 16 (Buy – $18.53). With value increasingly compelling, the recommendation remains BUY.