News Corp Earnings: Cable Business, Improving Ad Market And Sports In Focus

We expect a strong performance from cable networks business when News Corp (NASDAQ:NWS) reports its Q2 fiscal 2013 earnings on February 6. Growth in the U.S. advertising market, a continued push to sports programming and the U.S. presidential elections are some of the factors that will boost results.

We estimate that the cable networks business is of paramount importance and constitutes roughly 55% of News Corp’s value. The general approach for News Corp and other media companies has been to reduce its dependance on the advertising revenues. Cable Networks are fundamentally more stable than broadcast networks as a substantial portion of its revenues comes from subscription fees. In addition to this, digital licensing of content is playing its part in boosting revenues and margins.

See our complete analysis for News Corp

How Are Fox Sports & Fox News Faring?

Fox Sports is one of the key networks for the company and given the high demand for sports programming, it makes sense for it to continue investing in it. News Corp has recently finalized some important agreements with Major League Baseball and NASCAR, as well as acquired Disney’s (NYSE:DIS) stake in ESPN Star Sports. The fee per subscriber continues to grow and a better advertising environment will further support its revenue growth.

In addition to this, Fox News has been performing well, surpassing not just competing news channels, but also other networks on many occasions. It has done substantially better than its direct competitors MSNBC and CNN. ^[1] The U.S. presidential elections held in the fourth quarter of 2012, drew a large audience, thus helping news networks boost their ratings. We believe the numbers for Fox News will show how it the benefited from the event.

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 that 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. 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 an 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 is another factor that may lead to an improvement in advertising revenues.

We expect the company to give color around new reporting structure following the spin off of its publishing division.

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1. TV by the Numbers [↩]