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This story features NEWS CORPORATION. For more info SHARE ANALYSIS: NWS

 – News Corp 3Q beats expectations
 – Full year earnings guidance maintained
 – Buyback increase leads to lift in FY13 earnings estimates
 

By Chris Shaw

Quarterly earnings from News Corporation ((NWS)) were well received by the market, the company reporting a 16% increase on underlying operating income to US$1.38 billion, which equates to normalised earnings per share (EPS) for the period of US37c. This compares favourably to consensus forecasts of a result around US31c.

Earnings guidance accompanying the quarterly result was for operating profit growth in the low-to-mid teens. Management has suggested the result is likely to be at the lower end of this range due to expected weakness in the Filmed Entertainment and Publishing divisions in the final quarter of FY12.

Given guidance has been maintained changes to earnings estimates have been modest, RBS Australia trimming its operating profit forecast by just 1% to US$5.64 billion ex charges relating to the phone hacking scandal in the UK. 

Earnings estimates in FY13 have generally been lifted given the quarterly result was accompanied by news of an increased share buyback to be completed by June 2013. News Corp now intends to repurchase US$10 billion in shares, up from US$5 billion previously. As a result, RBS has lifted its EPS forecast for FY13 by 3%, while BA Merrill Lynch's forecast increases to US185c from US178c previously and Macquarie makes minor increases to its estimates.

While the expanded buyback is a positive, Deutsche Bank expects current strong earnings momentum will continue into FY13 as News enjoys further growth from its content business in particular. Along with the increased buyback, which Deutsche takes as a sign of confidence in the business, there is valuation upside in the stock in the broker's view.

Deutsche's price target reflects this, as the unchanged target of $25.30 is well above the current share price. RBS Australia is another in the market to lift its price target, to $21.00 from $20.50, but Deutsche remains well above the consensus price target according to the FNArena database of $22.75.

Given the valuation upside on offer relative to price targets both BA-ML and Deutsche retain Buy ratings on News Corp, while UBS, Macquarie and Credit Suisse rates the stock as a Hold. RBS Australia has joined the latter group, downgrading to a Hold rating post the quarterly report.

For RBS valuation is not an issue as the stock continues to trade at a discount of around 20% relative to the broker's price target. The issue is the ongoing phone hacking scandal in the UK is likely to hang over the stock for some time, meaning this valuation gap is not expected to close anytime soon. As well, RBS suggests the catalyst of the buyback announcement has now passed and much of the re-rating has now occurred, meaning outperformance from now is less likely.

UBS tends to agree shorter-term catalysts are lacking, as while the 3Q result was better than expected the fact full year guidance has been maintained suggests conditions will be tougher in the final quarter of the financial year.

For Macquarie the positive of the increased buyback only becomes apparent in an earnings sense from FY14. Given this and the fact the stock has had a strong run of late, no increase from a Neutral rating can be justified.

Shares in News Corp today are stronger in a slightly higher market and as at 10.25am the stock was up 13c at $20.29. This compares to a range over the past year of $13.32 to $20.44, the current share price implying upside of around 12% relative to the consensus price target in the FNArena database.

 
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