What’s Fueling News Corp’s Stock?
Even though News Corp (NASDAQ:NWS) has been surrounded by the scandal related to its U.K. news paper division, News of the World, the company’s stock has recovered significantly since 2011. The scandal not only threatened the public image of the company, but also suppressed its market valuation. However, since then the company has posted strong results beating analyst estimates, made some restructuring decisions, focused on expanding sports programming and added to its share buyback program. These efforts and results have together boosted confidence among investors, and may continue to fuel the stock growth.
See our complete analysis for News Corp
Company Restructuring Is A Positive Sign
One of the factors that seems to be sustaining the stock surge recently is News Corp’s decision to spin off its publishing business, and operating its movie and TV business units separately.
The phone hacking scandal affected the company’s publishing business in the U.K. Separating its TV and movie business from this scandal, and redefining its image while keeping bad publicity to a separate unit seems like a good decision. This way, News Corp can dilute any impact of the scandal on the value of its remaining businesses. Additionally, unlike its movie and TV networks businesses, the publishing business has not shown much strength and perhaps would be better managed as a separate entity. Given the size of its TV and film businesses, these units may attract a higher valuation as a standalone entity in effect, unlocking value.
We note that News Corp’s Q1 fiscal 2013 results were a mixed bag. While the company reported significant growth in revenues and profits for its TV business, publishing and Sky Italia were down. Film entertainment revenues were down slightly but the profits were up. This demonstrates very different characteristics and trends in these different businesses, further emphasizing the validity of News Corp’s decision to spin off its publishing unit and its plan to operate its movie and TV businesses as separate units. The focus on becoming leaner and insulating its businesses from each other will benefit the company and improve visibility for investors.
News Corp’s Investment In Sports Is Welcomed
ESPN’s success has encouraged News Corp and other media companies to make a move into sports programming. This is a good move since sports programming has maintained its high demand while charging a high fee per subscriber. We estimate that ESPN brings roughly $11 billion in revenues for Disney (NYSE:DIS) and close to $5 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) and as a result, commands a valuations of over $40 billion. It is going to be hard for the competitors to emulate its success, given that ESPN has bagged long term rights for many major sporting events. However, there will be good competition for the second spot, and Fox and NBC are vying for this!
News Corp. recently announced that it will acquire 49% equity stake in YES Network. This will help the company in strengthening its regional sports programming as Yes Network’s focuses on games of the New York Yankees and Brooklyn Nets.
However, the efforts don’t stop here. The company also plans to launch a national sports network to compete directly with ESPN and this may happen sometime in 2013. In addition to this, News Corp has won shareholder approval for its $2 billion bid for Consolidated Media holdings which will give the company control of Fox Sports in Australia and 50% ownership of Foxtel, which has near monopoly in the Australian pay-TV market. [1]
The strategy is to strengthen sports programming both in the U.S. and the international markets. International efforts also include the company’s purchase of 50% stake in ESPN Star Sports (ESS), a joint venture between ESPN and News Corp that operates several sports networks in Asia under ESPN and Star Sports brands.
Margin Improvement
News Corp has demonstrated strength in its cable networks business driven by an improvement in advertising and subscription fee. This segment saw 16% growth in revenues in the recent quarter, thanks to 16% and 25% growth in affiliate revenues for domestic and international operations respectively. This growth has resulted from News Corp’s focus on its sports network and original content for other networks such as FX, which has allowed the company to negotiate price increases. As a result, margins have grown too.
EBITDA margins for News Corp’s cable networks have increased from 29.3% in 2008 to 37.5% in 2011, and are trending toward 39% for the calendar year 2012. In comparison, Disney’s cable networks’ margins stand at around 45%. We believe that Disney has the advantage of ESPN, which garners high pricing due to strong demand for its sports programming and thus higher margins. In addition to this, Disney Channel has gained a lot of popularity among kids, even surpassing Viacom’s (NASDAQ:VIA) Nickelodeon. We believe that Disney has a superior pricing power to News Corp and therefore our margin forecast for News Corp stands at a lower value of around 40%. Given the pressure from pay-TV companies and increasing programming expenses, we see limited room for profit margin growth.
However, continued growth in digital licensing, investments in sports programming and expansion in international markets can provide some operating leverage to News Corp. If the company is able to increase its cable networks’ EBITDA margins to 46% by the end of our forecast period, there could be 10% upside to our current price estimate, thus making it a $31 stock.
Our price estimate for News Corp stands at $28, implying a premium of little under 10% to the market price.
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Notes:- News Corp. Bid for Australia’s Consolidated Media Wins Shareholder Approval, The Hollywood Reporter, Oct 31 2012 [↩]