News Corp’s Print Media Will Continue To Decline, Though Other Segments Show Promise

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News Corp’s (NASDAQ:NWSA) print business continues to face headwinds amid declining circulation and a shift in ad spending to other media. The trend is visible across the industry due to higher penetration of the Internet. As online information becomes more abundant, customers are becoming less likely to pay for the same information, which has resulted in a decline in the company’s print subscriber base. Lower readership has further led to a decline in advertising income. That said, the company is aggressively expanding into digital media. And though the revenue generated therefrom has yet to fully offset the decline in print media revenue, it will do so, in our view, going forward. Let us take a closer look.

This decline in print media primarily impacts the company’s news and information services segment, which accounts for a little under 7% of the company’s stock value, according to our estimates. Core assets of the segment are industry titans, however, and include the print editions of The Wall Street Journal and Barrons.  Still, the low value contribution can be attributed to lower margins (5% in 2014) associated with the division. The segment contributed around 70% to the company’s overall revenues in 2014, but the contribution towards overall EBITDA was much lower (38% in 2014), reflecting lower margins in this business.

The other segments, clearly, are key contributors to the company’s valuation.  In our estimation, digital media comprise 28% of the valuation, while cable network programming and book publishing an additional 19% and 10%, respectively. In fact, net-of-debt cash is the largest constituent of valuation at 36%. In short, these other segments are the key drivers of growth and profitability going forward. Indeed, in our model, non-print media revenues grow from $2.6 billion in 2015 to $3.5 billion in 2021, while print media revenues barely hover around the present level of $6.0 billion.  We will take a closer looks at the segment, given its continuing dominance of the business model.

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Print Media: A Closer Look

The segment’s revenues are derived primarily from two sources – advertising and subscription. Advertising revenues declined from over $4.10 billion in 2010 to a little under $3.40 billion in 2014. Looking at subscription revenues, they declined from $2.30 billion to $2.20 billion during the same period. [1] EBITDA margins also plunged from over an estimated 11% to around 5% during the same period.

This decline can largely be attributed to free online sources that have put pressure on the company’s paid products, while stagnation of print services remains a concern. Advertisers are now allocating more of their budgets for digital media than for print ads. As a result, the U.S. print ad spending has declined over the past few years and is expected to decline 8% in 2015 to $28 billion or 15% of the overall U.S. ad spending. ((2015 Ad Spend Rises To $187B, Digital Inches Closer To One Third Of It, Tech Crunch, Jan 20, 2015)) For the time being, growth in digital publishing has not been able to offset the decline in print media. However, in the long run, it should help the company revive its advertising as well as subscription revenues primarily for its well-established brands such as The Wall Street Journal and Barrons, which have affluent readership.

Accordingly, we expect advertising revenues to continue to decline in the near term and stabilize thereafter driven by growth in digital sales. We forecast advertising revenues to be around $3.25 billion, subscription revenues to be less than $2 billion and $530 million in other revenues for news and information services division by the end of our forecast period. An estimated EBITDA margin of 8% will translate into EBITDA of $465 million, representing around 35% of the company-wide EBITDA.

We estimate revenues of about $8.60 billion for News Corp in 2015, with EPS of $0.43, which is in line with the market consensus of $0.42-$0.55, compiled by Thomson Reuters. We currently have a $20 price estimate for News Corp, which is around 30% ahead of the current market price.

See our complete analysis for News Corporation

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Notes:
  1. News Corp’s SEC Filings []