Last night, News Corp (NWSA) reported adjusted fourth-quarter earnings of 7 cents per share, beating analysts consensus estimate of 5 cents, as a number of its assets turned in good performances. The company’s revenue came in at $2.14 billion, a little shy of of analysts’ $2.19 billion estimate.
Meanwhile, NWSA said that it would stop marketing products made by its Amplify Access division, which sells tablet computers and instructional software, to new customers. The company took a $371 million writedown on the division and reported that it was “in the final phase” of talks about selling the rest of its digital education unit to a “potential acquirer.” The unit had an EBITDA loss of $24 million last quarter.
Including the writedown and other impairment and restructuring costs, NWSA reported an EPS loss of 65 cents.
Meanwhile, the media conglomerate instituted a 10-cent per share, semiannual dividend.
Shares of NWSA stock rose 5% in after-hours trading, as investors were probably pleased by the company’s better-than-expected profit along with the announcements about the dividend and the digital education unit.
These positive catalysts may propel NWSA stock higher in the short-term, and the company is launching promising initiatives that could move the needle over the longer term.
However, News Corp’s risk-reward ratio looks unattractive over the intermediate term, as it continues to battle negative newspaper advertising trends, while its more profitable assets still make up a small percentage of its overall business. Additionally, NWSA stock isn’t cheap, and it could be quite vulnerable to macroeconomic weakness.
Digging Into News Corp Earnings
Several of News Corp’s assets performed rather well last quarter, helping News Corp earnings beat expectations. The Wall Street Journal’s ad revenues rose both year-over-year and quarter-over-quarter. The newspaper’s subscription revenue increased 7% year-over-year, and NWSA said that the WSJ’s ad trends improved last month.
Excluding currency fluctuations, the revenue and EBITDA of News Corp’s REA Group, which operates real estate information websites, surged 15% and 18%, respectively, year-over-year. And the EBITDA of News Corp’s cable business jumped 16% year-over-year, while its revenue increased 15%, excluding currency fluctuations. But the combined revenue of the company’s digital real estate services and cable business only accounted for 15% of News Corp’s total revenue last quarter.
And the company’s core advertising business continues to look weak, constraining News Corp earnings. Ad revenue from its News and Information Services business fell 13%, or 7% year-over-year in local currencies. Advertising accounted for 55% of the unit’s revenue last quarter, and the unit generated about two-thirds of the company’s total revenue.
Most of the company’s newspapers continue to struggle, with the revenue of its British and Australian newspaper businesses falling significantly, even excluding currency fluctuations. Overall, the revenue of the News and Information Services unit dropped 10% year-over-year, although the decline was only 2% excluding currency fluctuations. But a 2% decline is still nothing to celebrate.
However, NWSA has multiple exciting initiatives that could bear fruit and significantly improve the company’s results and boost NWSA stock over the longer term. One example is Storyful. Described by the company as “the first social media news agency,” it disseminates Internet video content. Moreover, the company indicated that it is expanding its use of video across all of its news websites.
As cord cutting proliferates, Storyful and the company’s other Internet video initiatives could gain significant traction. Additionally, NWSA acquired a stake in a real estate marketing platform in India and bought a consumer financial website in that up and coming market. And the company’s real estate websites could start generating needle moving profits if the global economy meaningfully improves.
But investors should be wary of NWSA stock over the medium term. Given the company’s exposure to advertising and real estate, NWSA’s earnings could take a big hit if the global economy slows significantly. And despite the ad headwinds the company is facing, NWSA stock isn’t cheap, trading at nearly 25 times next year’s consensus EPS estimate.
NWSA stock could be attractive for short-term traders, and its real estate website and video news initiatives could significantly boost its results and NWSA stock over the longer term. However, in the medium term, the company’s growth will likely be constrained by ad headwinds, and it remains vulnerable to economic slumps at an unattractive valuation.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities