In this article, let's take a look at News Corporation (NWSA, Financial), a $9.1 billion market cap company, which is a diversified media company that has interests in newspapers, books and sports cable programming, and operates online properties, primarily in the United States, Australia and the United Kingdom.
Business model
The company operates in an industry which is subject to major changes. The traditional print-based publishing model is being replaced by other sources of information like the internet.
This is important because about 80% of its earnings came from the traditional print model. We must say also that it is better positioned than most of its peers for this transition to new technology and innovation in general.
Further, it has acquired a minority stake in an Indian company PropTiger.com for $30m. This market looks promising in the near future.
Strong financial position
The company's financial position is strong, with no debt on the balance sheet and excess cash. This situation makes the firm allocate funds on profitable projects. “We see a big digital opportunity in India, where digital use is booming and demographics are favorable, and this is the first stage … the beginning of several things we would do in the future”, said Raju Narisetti, News Corp’s senior vice-president for strategy.
Australian television
As part of a diversification strategy, the firm owns a 50% stake in FoxTel, which is a pay TV operator in Australia. This company had about 2.6 million subscribers and annualized EBITDA of almost $1 billion.
Revenues, margins and profitability
Looking at profitability, revenue grew by 3.76% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.11 vs $0.05). During the past fiscal year, the company turned its bottom line around. It earned $0.41 versus -$1.92 in the previous year. This year, Wall Street expects an improvement in earnings ($0.55 versus $0.41).
The company´s gross profit margin is considered good, at 38.88%, and it has increased from the same quarter the previous year. The net margin of 3.2% is ranked higher than 72% of the 541 companies in the Broadcasting-TV industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| NWSA | News Corporation | 2.14 |
| GCI | Gannett Co Inc | 17.41 |
| MDP | Meredith Corp | 13.54 |
| Ă‚ | Industry Median | 6.90 |
The company has a current ROE of 2.14% which is lower than the one exhibit by Gannett (GCI, Financial) and Meredith (MDP, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 33x, trading at a discount compared to an average of 41.9x for the industry. To use another metric, its price-to-book ratio of 0.7x indicates a discount versus the industry average of 2.76x while the price-to-sales ratio of 1.05x is below the industry average of 2.12x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
Although the company tries to diversify its business in order to offset the print publishing model, it is true that it could fail. We are confident of the management´s expertise and we believe it will survive to the new landscape. Also, the PE relative valuation makes me feel bullish on this stock.
Hedge fund gurus like Bill Nygren (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Richard Pzena (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as HOTCHKIS & WILEY.
Disclosure: Omar Venerio holds no position in any stocks mentioned
