News Corporation Class B (voting)

When we open the quarterly report from this multinational media conglomerate, we skip the headlines and head straight to the divisional results, in particular to see how the crown jewel is performing. Cable Network Programming is the main reason we bought News Corp shares. The division produces content for cable and satellite television distributors. News Corp’s most valuable asset had a lot of ‘baked in’ future growth when we recommended the stock a few years ago, and that’s still being felt in the latest result.

In the first quarter ended 30 September 2012, revenue from Cable Network Programming rose 16% over the prior corresponding quarter to US$2.4bn, leading to a 23% increase in earnings before interest and tax (EBIT) to US$953m. This despite a currency headwind from a strengthening US dollar, leading to a decline in contribution from non-US channels. Earnings from the division have risen from US$659m for the same quarter two years ago (when we first recommended the stock) to US$953m—a big part of the explanation for why News Corp stock has performed so well for members and our Growth portfolio.

The lumpier but still important Filmed Entertainment division also had a good quarter, with EBIT up 15% to US$400m, helped by the animation smash hit Ice Age: Continental Drift. For the smaller divisions, the turnaround in Television continued with a 17% lift in EBIT to US$156m; Publishing EBIT fell 48% to US$57m lead in particular by declines in the Australian and US mastheads; and there was an even sharper 81% fall in EBIT from Direct Broadcast Satellite Television (Sky Italia) to $23m, due to temporarily higher programming expenses (including US$70m related to the Olympics), currency movements and a small reduction in subscriber numbers.

The result continues the trend of recent years, underwhelming results from the smaller divisions far outweighed by strong growth from Cable Network Programming. The company continues to buy back its own stock with vigour, having spent nearly US$6bn to retire more than 10% of its equity base at prices averaging US$18.74 per share. It’s likely to prove a long-term shareholder-enriching use of capital. There has been no further important news on the separation of the publishing assets from the media and entertainment businesses, a matter that will likely take another 6-9 months and should also be good for overall shareholder prosperity.

We left the prices in the attached recommendation guide unchanged for now. But if the stock does trade much north of $25, we’ll undertake a full review before deciding whether to actually downgrade—we don’t want to let this stock, and the excellent businesses that stand behind it, go too cheaply. HOLD.

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