Why Did Fairfax Media Jump More Than 10%?

You don’t see too many billion-dollar companies make double-digit-percentage gains in one day. But Fairfax Media Ltd [ASX:FXJ] did exactly that today.

The stock reached a high of 96 cents when the market opened this morning. It was a 10.34% jump from its previous close. In dollar figures, the stock gained $23 million overnight.

Fairfax Media Share Price

Source: Google Finance

Why did the Fairfax share price rise?

This morning, Fairfax released their half-yearly accounts for FY17.

Revenues were down 4.7%, to $913 million. Yet a fall in revenues didn’t stop earnings improving. Earnings before interest and tax (EBIT) was up 0.3%, to $126.8 million. And net profit after tax (NPAT) was up 6.1%, to $84.7 million.

Fairfax CEO Greg Hywood commented on the group’s results, stating:

Our three publishing businesses maintained an intense focus on cost reduction, a stronger emphasis on digital publishing, and made progress in building new revenue opportunities.

Our cost reduction programs underpinned a 5% decline in operating expenses, notwithstanding continued investment in our growth business.

Domain Group delivered strong digital advertising growth of 15%, notwithstanding a challenging listing environment.

We are pleased with the continued profitability of our publishing businesses in the face of the largest structural change in the industry’s history. This is remarkable performance that few publishers globally have matched.’

And it seems investors think so too, judging by the spike in the share price.

What now for the FXJ share price?

If you’re holding or looking to buy Fairfax shares, today’s results give you more information on what to do next. While earnings increased, it wasn’t due to growth in the industry market. Rather, the earnings-increase came about through cost-cutting.

Fairfax sees their main growth driver as Domain Group. And it’s why they’ve proposed a separation from Domain during this financial year.

This would allow Domain to be its own entity on the ASX. Much like South32 Ltd [ASX:S32] is to BHP Billiton Ltd [ASX:BHP].

Fairfax would hold between 60–70% of Domain, allowing investors to pick up the rest. ‘This strategic initiative arises from the Board’s determination to maximise returns for Fairfax shareholders from Domain Group,’ Fairfax chairman Nick Fallon said.

He went on to say that Domain is positioned for strong long-term growth. And it may well be. Though splitting the company in two might also see Fairfax’s stock price potentially slip.

Why?

Investors will have a better picture of what the Fairfax business looks like. And they may think, without Domain cluttering financials, that Fairfax is worth less than they originally thought.

But separating the two could also cause the stock to appreciate in the future. Fairfax said this morning that split board and management teams will be better able to develop strategies, capital and investments within their companies.

What they are saying is that a Fairfax/Domain split could strengthen both companies’ revenues by focusing on each individual business.

Yet we won’t know until it actually happens. But it might be a stock worth keeping your eye on.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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