News Corporation's Second Quarter Highlighted by Book Publishing Earnings Up 33%

News Corporation's second-quarter earnings before interest, tax, depreciation and amortisation, or EBITDA, increased 9% to USD 327 million demonstrating the strong contribution of earnings from the non-newspaper assets. Digital real-estate services business, REA Group, continues to capture a growing share of advertising expenditure for real estate listings with its revenue contribution up 18% and EBITDA up 20%. The book publishing division surprised, with revenue up 4% for the quarter while EBITDA increased by 33%. This material increase in operating margin reflects the company's focus to drive down costs through the reduction in headcount and transition to eBooks, which increased its revenue contribution by 40%. This better-than-expected performance leads us to increase our book publishing EBITDA margin assumptions from an average of 9% during the next five years to 11%. We increase our fair value estimate from USD 17.00 to USD 18.00 to reflect this change. We use the current Australian dollar/U.S. dollar exchange rate of 0.90 to translate this value into an Australian dollar fair value estimate of AUD 20.00. We view the stock as undervalued. We expect the ongoing performance from the non-newspapers divisions will be the catalyst for the share price to move towards our fair value estimate.