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What to Expect Today From CBS and News Corp

NEW YORK (TheStreet) -- CBS (CBS - Get Report) does television, and News Corp.  (NWSA - Get Report) mostly does publishing. And that's still a problem, for News Corp.

When the two companies report earnings today at the close of trading in New York, their divergent paths will continue to become more apparent.

Publishing revenue at New Corp., which owns The Wall Street Journal and The New York Post, tumbled 9% during the final three months of 2013, and even as the company is acquiring new properties to boost online revenue, publishing still generates more than 70% of the company's total revenue. Chairman Rupert Murdoch split News Corp. from 21st Century Fox Inc. (FOXA) in June to form a new business focused largely on publishing. (News Corp. did retain Murdoch's Australian TV businesses, providing the company with some exposure to a faster growing medium.)

But New Corp. is hardly alone among newspaper publishers. Even as publishers emphasize digital, the reality is that digital growth at newspapers has slowed. It's true at the Journal just as it's true across the industry.

U.S. newspapers in 2013 generated $23.6 billion in advertising revenue, according to a report from the Newspaper Association of America. Of that figure, $17.3 billion is from print advertising whereas $3.4 billion is from digital. That's a cavernous divide. More concerning, digital advertising in 2013 increased by a mere 1.5%, a marked slowdown from the 2000s when percentages for digital advertising growth at U.S. newspapers were firmly in the double-digits.

But digital growth won't mark the industry's panacea. At least, not yet. Digital advertising rates just don't command anywhere near the prices that newspaper publishers are still able to get for print advertising. Call it a better model (it's easier to NOT look at a digital ad), or a business legacy, but the reality remains: print pays better than digital.

Clearly, News Corp.'s strategy is diversification - using cash flow to acquire online properties with the potential to grow. News Corp. did that last year when it acquired Storyful, the digital news outlet, and similarly last month when it bought romance publisher Harlequin Enterprises from Canada's Torstar Corp. for C$455 million ($415 million) in cash. Harlequin will become part of News Corp.'s HarperCollins books unit. Harlequin publishes more than 110 titles a month in 34 languages; that might be the root of the world's problems, but that's a topic for another column.

As for today, News Corp. is expected to report $2.1 billion in sales for its fiscal third-quarter, according to the average of a Bloomberg survey of seven analysts. Net income is forecast to reach $19.3 million with an adjusted earnings per share of 30 cents. News Corp. shares have lost 5.2% this year compared to the S&P 500 (^GSPC) which has gained 1.6%. Analysts are rather lukewarm on the shares: 9 rate the publisher a buy while another nine rate it hold with one sell, according to Bloomberg.

CBS, of course, makes television programming, and as long as the pay-TV bundle is protected and the FCC upholds the retransmission rules, CBS will do quite well. If Comcast (CMCSA) gets its wish to buy Time Warner Cable (TWC), thereby controlling the largest stake of broadband connections in 19 of the 20 largest cable-TV U.S. markets, the moat around broadcast television will be further fortified.

As the country's most watched network, CBS, the maker of the police drama NCIS, remains a linchpin for Comcast and other pay-TV providers. The only current threat to the bundle is a surprise victory by Aereo at the Supreme Court, a landmark decision that would tickle the engineer-turned-gadfly Chet Kanojia as well as Alki David, the billionaire owner of FilmOn, a similar service focused on local broadcasting and user generated videos.

Regardless of how the court rules in June, CBS CEO Leslie Moonves, he of the $62 million annual compensation package, doesn't appear worried. Moonves said earlier this year that regardless of Aereo's future as a going concern, CBS will top $2 billion in revenue from retransmission fees, money it receives from pay-TV providers to carry CBS programming. 

The future is bright for CBS because unlike newspaper publishers, CBS is finding more places to sell its inventory of programs. Not only does CBS use its top-ratings numbers to extract favorable deals from pay-TV providers, Moonves is also licensing more shows to Amazon (AMZN) and Hulu. The more revenue streams, the better.

Moonves has created more buzz for CBS with the planned split of its 81% stake in company's billboard advertising unit, CBS Outdoor, scheduled for later this year. Current CBS shareholders will be offered shares in Outdoor in exchange for current shares in CBS. The parent company then plans to retire those shares, in effect, executing a share buyback along with the split. It's one reason 25 analysts rate the stock a buy while eight are neutral, according to a Bloomberg survey. 

CBS, which doesn't give earnings guidance, is expected to report a 5.8% increase in sales to $3.9 billion, according to the average of 23 analysts surveyed by Bloomberg. Net income is forecast to come in at $446 million with earnings per share of 75 cents.

But investors should expect CBS to beat those numbers -- they've done it in 17 of the last 18 quarters.

--Leon Lazaroff is TheStreet's deputy managing editor.

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Leon Lazaroff is TheStreet's deputy managing editor.

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