News Corp: Result 2012

Unsurprisingly, it was the US$3.0bn in pre-tax write-downs to News Corp’s Publishing division that caught all the attention on CNN and elsewhere yesterday. While the amount was large, it should have been no great surprise given the obvious structural problems in the newspaper business in general, the phone tapping scandal in particular and the coming separation of News Corp's publishing operation from its media and entertainment assets—a major cleaning of the books often precedes a spinoff.

The results from Publishing were polluted by write-downs in both 2011 and 2012, but we make the fall in underlying earnings before interest and tax (EBIT) 17%, to US$821m. There’s no doubt this business faces significant hurdles. But we’ve valued the newspaper assets at less than most brokers for years, and the mastheads aren’t that important to our sum of the parts analysis—see, most recently, News Corp: Scandal? What scandal? of 10 Feb 12 (Hold – $18.91).

Let’s now move on to the real attraction of News Corp. Its most important division—Cable Network Programming—was again a standout performer, delivering US$3.3bn of divisional EBIT, an increase of more than US$500m (19%) compared with 2011. The more volatile Filmed Entertainment business also performed well, growing EBIT by 22% to US$1.1bn on the performance of a few key films. As you can see in table 1, growth in the television business slowed after last year’s impressive turnaround, and the Direct Broadcast Satellite business (Sky Italia) performed well considering Italy’s economic woes. Directors declared a final dividend of US$0.085 per share. It’s also worth noting that the company has bought back more than 10% of its equity base over the past year at prices averaging a little over US$18 per share, adding value in the process.

We’ll update our sum of the parts numbers in a review soon. But, with both classes of stock up roughly 50% in the past 12 months, there’s clearly less of the hidden value that attracted us to News Corp in the first place. We don’t think it’s yet time to sell, but the margin of safety has shrunk and it’s no longer clearly worthy of a positive recommendation. For now, HOLD.

Note: The Growth portfolio owns News Corp non-voting A-class shares.