Global media and publishing company News Corp (NASDAQ:NWSA) beat analysts' expectations in Q2 FY2024, with revenue up 2.6% year on year to $2.59 billion. It made a GAAP profit of $0.27 per share, improving from its profit of $0.14 per share in the same quarter last year.
News Corp (NWSA) Q2 FY2024 Highlights:
- Revenue: $2.59 billion vs analyst estimates of $2.56 billion (0.9% beat)
- EPS: $0.27 vs analyst estimates of $0.18 (46.8% beat)
- Free Cash Flow of $326 million is up from -$257 million in the previous quarter
- Gross Margin (GAAP): 50.5%, up from 48.7% in the same quarter last year
- Market Capitalization: $23.67 billion
Established in 2013 after a restructuring, News Corp (NASDAQ:NWSA) is a multinational conglomerate known for its news publishing, broadcasting, digital media, and book publishing.
News Corp was created to focus on delivering news and media services in the digital age. At its core, it seeks to address the need for reliable news, diverse entertainment, and educational content.
The company's portfolio spans well-known news outlets such as The Wall Street Journal, TV stations, digital media platforms, and publishing houses. This wide range of perspectives and formats caters to diverse consumer preferences for both traditional and digital media.
News Corp generates revenue through advertising, licensing fees, and subscription fees. Some of its content can also be purchased on a one-off basis.
Publishing
Publishing companies have been facing secular headwinds in the form of consumers abandoning traditional media in favor of streaming services. As a result, many publishing companies have evolved into hybrid or purely digital platforms. Those who garner growing audiences will benefit from the fact that dollars follow eyeballs, but others may not see worthwhile returns on investment.
Competitors in the news publishing and media sector include The New York Times (NYSE:NYT), Gannett (NYSE:GCI), and The E.W. Scripps (NASDAQ:SSP).Sales Growth
Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. News Corp's revenue was flat over the last 5 years. 
Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Just like its 5-year revenue trend, News Corp's revenue over the last 2 years has been flat, suggesting the company is in a slump.
This quarter, News Corp reported reasonable year-on-year revenue growth of 2.6%, and its $2.59 billion of revenue topped Wall Street's estimates by 0.9%. Looking ahead, Wall Street expects sales to grow 3.5% over the next 12 months, an acceleration from this quarter.
Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
News Corp was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer discretionary business, producing an average operating margin of 6.9%.
in line with the same quarter last year. This indicates the company's costs have been relatively stable.
EPS
We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable. 
Over the last 5 years, News Corp's EPS dropped 3%, translating into 0.6% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer discretionary sector, where diminishing earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
In Q2, News Corp reported EPS at $0.27, up from $0.14 in the same quarter a year ago. This print beat analysts' estimates by 46.8%. Over the next 12 months, Wall Street expects News Corp to grow its earnings. Analysts are projecting its LTM EPS of $0.65 to climb by 103% to $0.80.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Over the last two years, News Corp has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 4.9%, subpar for a consumer discretionary business.
News Corp's free cash flow came in at $326 million in Q2, equivalent to a 12.6% margin. This result was great for the business as it flipped from cash flow negative in the same quarter last year to positive this quarter.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
News Corp's five-year average return on invested capital was 6.2%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, News Corp's ROIC has averaged a 1 percentage point increase each year. This is a good sign, and if News Corp's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from News Corp's Q2 Results
We were impressed by how significantly News Corp blew past analysts' EPS expectations this quarter, driven by a convincing beat on the EBITDA line. We were also happy its revenue narrowly outperformed Wall Street's estimates. On the other hand, free cash flow missed. Zooming out, we think this was a solid quarter that should have shareholders cheering. The stock is flat after reporting and currently trades at $24.27 per share.
Is Now The Time?
News Corp may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of News Corp, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last five years makes it hard to trust. On top of that, its low free cash flow margins give it little breathing room.
While we've no doubt one can find things to like about News Corp, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
Wall Street analysts covering the company had a one-year price target of $21 per share right before these results (compared to the current share price of $24.27), implying they didn't see much short-term potential in News Corp.
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