NewsCorp (NWS) Postscript - Cyclical Downturn or Secular Change for Advertising?

Notwithstanding the approximately $2B write down in value of its $5.7B takeover of Dow Jones in late 2007, the release of 2Q09 NWS financial results last week also raised concerns over the future of advertising.

In the conference call accompanying the earnings release, Chairman and CEO Rupert Murdoch indicated the possibility that when the economy finally recovers, advertising dollars may never return to major media outlets at previous levels given the impact of the Internet, which continues to fragment end markets and challenge traditional mass marketing techniques. According to Murdoch, there is ?an almost infinite increase in inventory for websites and for display. So, there is constant downward pressure on the rates you could get.?

NWS reported a lower-than-expected 2Q09 loss of $6.4B, which included an $8.4B pre-tax non-cash impairment charge related to goodwill and identifiable intangible assets. Adjusted net income in 2Q09 was $320M, or EPS of $0.12.

Notwithstanding NWS's strong cash position, we believe the current weakness in advertising markets will continue to hamper earnings growth over the short term.? We have revised our share price target to incorporate management's sharply lowered FY09 guidance and move to a Hold rating at current levels.