With some analysts saying News Corp may have had its worst quarter’s financial performance for years in the March quarter, the man himself has done nothing to soften the gloom and doom emanating from the empire around the globe.

He said in an interview published in London that his British papers could lose money “for a year or three“, the story emerging the same day as figures published in the London Standard revealed poor operating results for those papers in the June, 2008 operating year.

News Corp produces its third quarter results early Thursday morning, Australian time, and the analysts reckon the group’s global newspaper business could have experienced the sharpest drop in earnings they’ve had for years.

In Australia the fall could be substantial, while UBS and a couple of others suggest the overall slump could be 45% or more for the business as a whole.

Goldman Sachs JBWere said yesterday that “newspapers are likely to join the TV segment this quarter with substantial declines. Having held up reasonably well in 2009, we anticipate that further ad market deterioration in the UK and Australia will cause a significant decline (c.80%) in EBIT this quarter.”

In fact earnings downgrades yesterday for APN News & Media and West Australian Newspapers (both for the second time in three months) tells us that the Australian media sector is now entering its toughest period. A leading investment analyst told me yesterday that the real crunch will come in 2010 (from July 1), which will be a crunch time for many listed and unlisted companies in the sector.

The downgrades (both are regional operators in that Perth is like a regional market, compared with Sydney, Melbourne and Brisbane) tells us that the sliding economy, rising unemployment, rising business failures and the resources slump will have an impact on all companies, from News Corp, to the Seven network, to Austar and advertising companies.

Murdoch said in the interview with a publication associated with the Brunswick Group, a high powered London PR and influence shaping company, that the UK papers will emerge from the recession stronger and with bigger market share. He will be 81, going on 82, if it lasts three years.

The Standard reported that losses at Times Newspapers, the publisher of The Times and The Sunday Times, jumped 17% from 44 million pounds to 51.3 million in the year to 29 June 2008.

That was before the recession hit the advertising market, a development that has seen the papers in the US (New York Post mostly), UK and Australia shed revenues and profits. The addition of the Wall Street Journal’s contribution has clouded the true picture in the News Corp papers.

The Standard said that Murdoch’s main UK paper group, News Group Newspapers, the publisher of The Sun and the News of the World, saw earnings slide 55 million pounds from nearly 62 million.

In the interview in the Brunswick Review, Mr Murdoch was reported in several London papers as saying: “[In] London, our papers are financially strong even if we don’t make much money for a year or three years … but we will come out of this with our franchises infinitely stronger … we will use our leadership and our strength to gain market share.”

He said he had been bearish on the economy, but “I never thought it would get this bad”.

And in a note to clients this morning, the Australian media analysts at Citigroup were very gloomy:

  • Advertising environment continues to deteriorate — would you believe further advertising downgrades? FXJ (Fairfax) worst hit.
  • Perfect timing difficult to achieve — advertising stocks have historically re-rated well before the end of an earnings downturn. We acknowledge that trying to exactly time trough-cycle valuations risks a significant opportunity cost. In this regard, we note APN, CMJ & WAN are trading at a discount to longer-term DCF valuations.
  • Target prices still based on FY10e PE valuations, discounts partially removed – While acknowledging longer-term value, we believe that earnings disappointment will ultimately see the media stocks give back (at least some) recent outperformance (i.e. media +26% vs. ASX200 +17% from 10 March ’09). We therefore continue to set target prices on FY10e PE valuations. However, we partially remove the discount to market here (i.e. now 10%, previously 20%), given greater certainty that the rate of decline in US corporate profits has slowed.
  • Cautious on excess leverage and overhangs — we reiterate Sell ratings on TEN and SEK. We remain cautious on the potential placement of INM’s 39% stake in APN to institutional investors but believe this risk is priced in; we reiterate APN at Hold.
  • Positive on revenue outperformance — we keep our Buy ratings on CMJ and AUN; upgrade AEO to Hold, based on its relative outperformance; and reiterate our Hold rating on FXJ and upgrade WAN to Hold based on revisions to FY10e PE valuations.
  • Changes to DCF valuation inputs — where not already adjusted, we take this opportunity to decrease assumed risk-free rates to 5.0% (from 5.5%) and increase market risk premiums to 6.5% (from 6.0%) in line with CIRA.

Peter Fray

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