Special Top Buy Pitch: News Corporation (NWS)
American Idol. Star Wars. The Wall Street Journal. MySpace.com. NFL NFC Football. What do all of these have in common? They are just some of the well known and valuable intangible assets controlled by the latest bi-weekly Top Buy: media conglomerate News Corporation (NWS).
News Corp is one of the largest and most diversified media conglomerates worldwide. The company's diversification covers both product line and geography. The lion's share of sales come from it's 20th Century Fox movie studio, it's FOX television network, and the growing array of cable television channels such as Fox News, FX, and Fox Sports Network (or FSN). Recently, News Corp has also made a move into business media, purchasing Dow Jones (the publisher of The Wall Street Journal) and launching the Fox Business Network to compete with CNBC. The diversification doesn't stop here, however. News Corp also owns SKY Italia, a direct broadcast satellite network in Italy, book publisher HarperCollins (one of the largest English language publishers worldwide), the Star TV network in Asia, several newspapers primarily in the U.K. and Australia, many well known websites such as MySpace.com and IGN, and so on. The full list of News Corp's businesses takes several pages in the 10-K!
Throw a dart at a board full of media stocks and you are likely to hit one that is pretty cheap by historical multiples. Advertising, where most of these companies earn their scratch, is greatly affected by weak economic conditions. As oil prices rise, the housing market continues to be weak, and credit crisis news dominates the headlines, the outlook for the broad economy is largely negative, and advertisers will cut back in anticipation of lower sales in the near future. News Corp, as well as primary competitors Disney (DIS) and Time-Warner (TWX), offer attractive valuations, to say nothing of the multitude of smaller newspaper, magazine, and TV broadcasting stocks that are really beat down.
But News Corp's valuation is grossly undervaluing not just it's recent results, but also it's considerable long term prospects. Media is a great place for building wide moats. First, you have content, which are intangible assets that can be monetized over and over again through all kinds of channels, from broadcast TV to the movie theatre to DVD sales to a Blu-Ray replacement for that DVD... the possibilities are almost endless. 20th Century Fox owns the rights to 7 of the top 25 highest earning movies of all time, and Fox TV has produced such popular series as The Simpsons, American Idol, House, and 24. The second factor in News Corp's wide moat is it's distribution network. The company can put content in front of viewers in nearly all parts of the world through it's TV, cable, and satellite distribution assets. This allows News Corp to not only distribute it's own content, but to exclusively license valuable third party content. A great example of this is the numerous exclusive or limited rights to sporting events that Fox owns, including NFL Football, Major League Baseball, NASCAR, and European soccer and cricket leagues. If viewers want to see these events, and advertisers want to reach those viewers, it has to be done through News Corp. Durable competitive advantages, indeed.
Another thing that sets News Corp apart from Disney or Time-Warner is the track record of taking successful risks. When the Fox Network was launched in 1986, it was the first new network in 40 years, and everyone predicted failure. In 2007, it was the #1 network across all demographics. Fox News was launched in the mid-1990's to compete with behemoth CNN. Within a few years, it was crushing CNN in the ratings. Also, media is a fast changing field these days, with the Internet and cable presenting a major obstacle to the traditional distribution of print, audio, and video media. News Corp is not standing still. In 2006 the company purchased leading social network site MySpace, and more recently bought a number of high traffic specialty sites that bring in demographics that are attractive to certain advertisers. I'm confident News Corp can succeed wherever media evolves... it's part of the corporate culture.
The biggest risk to an investment in News Corp is also one of the company's biggest assets: founder, Chairman, and CEO Rupert Murdoch. He's a legend in the business, and his shrewd leadership is a stark contrast to the value destroying heads of his main competitors. But he is 77, and the dynastic nature of the company means his son James is the likely heir. He is currently head of the European division, but much of News Corp's success can be attributed to his father, and the stock price could suffer if he steps down.
I highly recommend News Corp to all MFI investors, and welcome it as the latest MagicDiligence Top Buy.
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