Could There Be A Value Play in News Corp?

By Vinayak on Monday, September 9, 2013 with 0 comments

News Corp (NASDAQ:NWSA) was recently spun off from its "parent" company, Twenty-First Century Fox Inc (NASDAQ:FOX) and, due to this, it has been get a lot of institutional selling pressure. Sophisticated investors like the more promising and higher growth Motion Picture company better than the boring Newspaper and Book Publishing company.

News and Information Services

This segment is home to some of News Corp's valuable assets like the Dow Jones, The Wall Street Journal, Barron's, The New York Post, The Sun, The Times, Herald Sun, and more. These properties play an important role in making News Corp the best in news publishing. At the same time, it is a well-known fact that paper and print companies are facing declining revenues as traditional print is replaced with online media. News Corp, like its competitors, has been increasing its online offerings and has looked to capitalize by instituting a hard paywall for its online content. This has been a good move for the Wall Street Journal.

Fox Sports and Foxtel: Synergies create two wins

Fox Sports and Foxtel work very well in tandem. Fox Sports is essentially guaranteed programming on the Foxtel network, in this manner locking in viewership. Concurrently, Foxtel increases its value to consumers because offers Fox Sports. These two segments along with smaller offerings from the Cable segment generated about $469M in segment EBITDA in FY 2012. An important point is that the News Corp didn't raise its 50% stake in Fox Sports to 100% and 25% stake in Foxtel to 50% until November last year, thus this segment should drive value in the coming years as the market starts seeing its contribution to NWSA's operating results.

The market hasn't seen its value yet because they are viewed as 'boring' newspaper and book publishers. Fox Sports Australia and Foxtel are #1 in their respective industries: sports programming and subscription TV.

REA Group

REA Group is a pretty hot property. REA is Australia's #1 residential real estate web property, with as much as 19.4M visits monthly. It is well ahead of the competition on quite a lot of metrics.

Book Publishing

Book publishing is always going to be hot property whether or not print is being replaced by e-books. News Corp's book publishing division is #1 in Christian publishing (via HarperCollins). Furthermore the company is the top publisher in children's and non-fictions titles (publishing over 200 best sellers per year), and is #2 in overall publishing in the English language.

Investors must realize that even as revenues have been flat at $1.2B over the past few years, the profit margins are increasing as there is less inventory and working capital required to publish e-books.  

Major drivers of growth

The REA Group will be a key driver of growth for the NSWA. Then there is the fact that the News Corp is cash-rich and can fund stock buybacks. Management has established a $500M opportunistic buyback program to neutralize the anticipated selling pressure associated with the spinoff. The stock buyback itself could result in $1 per share rise in value.

One interesting point to note is that Free Cash Flow (FCF) of $408M reported on June 2012 does not include the doubled stakes in Foxtel and Fox Sports as of November 2012. The actual full-year FCF should be closer to $0.5B, not accounting for growth in other segments.

Then there is the expectation of dividends as management expects to introduce a regular dividend policy. The timing of this remains unclear, but when it happens it further have a positive impact on the stock price.


Bottom line

News Corp appears to be considerably undervalued right now, providing an asymmetric risk/reward proposition. It isn't that easy to estimate till when selling pressures remain, but there exists a potential upside of at least 50-60%, and I will be looking to go long before it reports earnings this week.

Category: Stocks



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