News Corp’s (NASDAQ:NWS) Q1 fiscal 2013 results were a mixed bag. While the company reported a significant growth in revenues and profits for its TV business, publishing and Sky Italia were down. Filmed entertainment revenues were down slightly but the profits were up. This demonstrates very different characteristics and trends in these different businesses, further emphasizing the validity of News Corp’s decision to spin off its publishing unit and its plan to operate its movie and TV businesses as separate units. The focus on becoming leaner and insulating its businesses from each other will benefit the company and improve visibility for investors.
Overall, News Corp benefited from strength in advertising and subscription fee increases. The company also saw growth in digital licensing and retransmission fee. However, Sky Italia suffered due to subscriber losses, Olympics related programming costs and foreign exchange effects. The publishing unit was down due to decline in advertising revenues as has been the case with the newspaper industry in general. The silver lining here is that cable networks are the biggest contributor to News Corp’s value and the growth there seems to be solid.
Fundamentals Remain Strong At Cable Networks
While the improved advertising market in the U.S. fueled by presidential elections and growth in automotive market helped News Corp’s cable networks post a healthy growth, the main push came from increase in affiliate fee revenues. Cable networks saw 16% growth in revenues for the quarter, thanks to 16% and 25% growth in affiliate revenues for domestic and international operations respectively. ((News Corp’s SEC Filings)) This has resulted from News Corp’s focus on its sports network and original content for other networks such FX, which has allowed the company to negotiate price increases.
Fox Sports is one of the key networks for the company and given the high demand for sports programming, News Corp’s best bet is to continue investing in important sports deals and expanding the network internationally. News Corp recently finalized some important agreements with Major League Baseball and NASCAR and acquired Disney’s (NYSE:DIS) stake in ESPN Star Sports.  In addition to this, Fox News has been performing well , surpassing not just competing news channels but also other networks on many occasions. 
We estimate that cable networks business constitutes roughly 55% to News Corp’s value, thus it is of paramount importance. The general approach for News Corp and and other media companies has been to reduce dependance on advertising revenues. Cable Networks are fundamentally more stable than broadcast networks as a substantial portion of their revenues comes from subscription fee. In addition to this, digital licensing of content is playing its part in boosting revenues and margins.
We are in process of updating our price estimate for News Corp in light of recent earnings and will have an update ready soon.
Our price estimate for News Corp stands at $28, implying a premium of more than 15% to the market price.Notes: