News Corp Should Show Upbeat Ad Trends And Subscription Fee Growth

We expect good performance from News Corp (NASDAQ:NWS) when it reports its Q1 fiscal 2013 results Tuesday. Driven by an improvement in the advertising market, political ad spending and the continued growth in its subscription and digital licensing businesses, the company could post healthy profit growth. Last quarter News Corp decided to spin off its publishing unit and further plans to operate its movie and TV businesses as separate units. The focus on becoming leaner and insulating its businesses from each other has created general optimism about the company, which has been reflected in the stock price. The upcoming earnings can potentially fuel this optimism.

See our complete analysis for News Corp

Improving Ad Market Will Help The Results

News Corp earns advertising revenues from its cable, broadcasting and publishing businesses. Overall, we estimate that approximately 40% of the company’s value comes from the ad-based business model.

This implies any change in the macro economic environment can significantly impact its profits. But the good news is that TV advertising spend in the U.S. has witnessed moderate growth in 2012. This growth has stayed above overall advertising market growth despite the slight decline in TV viewership, indicating the strengthening of ad pricing. ^[1] In fact, for the new TV season that began in September 2012, News Corp was able to secure $1.95 billion in ad fee from advertisers, implying ad pricing growth of 8% to 9% compared to 2011 (see News Corp’s TV Ad Sales Look Promising). In addition to the above, political ad spending will be another factor that may lead to an improvement in advertising revenues.

Apart from macro factors, the strong performance of News Corp’s cable and broadcasting networks bodes well for its ad pricing. Fox News has typically been one of the best performing networks for the company, surpassing not just competing news channels but also other networks on many occasions. ^[2] We believe the political debates and other related news items building up to the presidential election are further helping Fox News’ ratings, directly benefiting its advertising revenues.

However, the negative factor in play here is ad revenue diverted to the Summer Olympics. Although we do not have concrete figures, we believe that NBC’s broadcast of the Olympics has affected ad revenue of other media companies.

Subscription Fee & Digital Licensing Will Aid Margins

Like other media companies, News Corp is focusing on boosting its affiliate fee and licensing business that mainly consists of subscription fee received for its cable networks, retransmission fee for broadcasting network, international syndication, and licensing of TV shows both on pay-TV and digital platforms.

The increase in subscription fee income has resulted from an increase in the number of subscribers and growth in fee per subscriber. However, as subscriber growth declines due to the saturation in pay-TV market, we expect the increase in fee per subscriber to provide a stable source of revenue growth for the company. Fox Sports, which is News Corp’s biggest subscription revenue generator in the U.S., has seen its average fee per subscriber increase from $2.30 in 2008 to close to $2.60 in 2012.

News Corp has been making additional investments in the sports arena. The company bought its remaining stake in Fox Sports Australia through its acquisition bid for Consolidated Media Holdings. It also bought Disney’s stake in ESPN Star Sports, a joint venture in Asia, in June 2012. It is clear that News Corp is expanding its presence in sports programming and the impact of this will be visible in its results.

Not Much Expectation From Movie Business

We are not enthusiastic about News Corps’ filmed entertainment results due to the following reasons.

The movie business margins are so low that its cash profits pale in comparison to what media companies earn from cable and broadcasting networks. In the case of News Corp, while cable and broadcasting networks together constitute 65% of its value, movie and TV show production and distribution businesses constitute just 20%. If we look at movies alone, this value contribution comes down further significantly.

Additionally, the movie business is quite unpredictable. One of the good ways to judge the annual success is to look at the successful franchises that the media companies own and whether their sequels are scheduled for release. News Corp trailed other major studios in terms of box office revenues in 2011 and the trend is continuing in 2012 as well, according to Box Office Mojo. Given the relative weakness of its franchises and no major sequels scheduled for late 2012 or 2013, we expect News Corp to perform below other major studios in the short-to-medium term.

Our price estimate for News Corp stands at $26.60, implying a premium of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Data Dive: US TV Ad Spend and Influence (Update), Marketingcharts.com, Sept 14 2012 [↩]
2. Fox News scores big ratings win, Los Angeles Times, Oct 23 2012 [↩]