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News Corp was hit hard by a terrible ad market in Q3, with sales down 16% and operating income down 48%, despite reductions in the cost structure. The pain was felt most acutely in News Corp's broadcast television and newspaper segments, where sales fell 29% and 28%, respectively. Most all of this was due to drastically lower demand and rates for advertising, particularly auto, financial, and movies, due to the weak economy. Bright spots included the cable networks, where FOX News doubled operating income and enjoyed a 23% rise in ratings, and the notoriously up-and-down filmed entertainment business, which delivered 8% growth in sales. News Corp also benefited from a partial sale of it's stake in NDS group, and from favorable tax settlements, making the bottom line slightly higher than 2008.
At a current price of about $10.50, MagicDiligence believes News Corp. is priced appropriately given the near and medium term outlook, and the stock has fallen off the MFI screens. Its broadcast television, and especially, the newspaper, segments are rather unattractive long-term as viewers and readers move to more modern conduits like the Internet and cable. Here, too, News Corp. has a presence, but a smaller one in comparison. Also concerning is that the largest recent acquisition, Dow Jones, was over-payed for and falls into the unattractive newspaper business. News Corp. should be held by those who already own it and then sold when its year is up.
News Corporation is one of the largest media conglomerates in the world, with wide diversification in both product line and geography. The company has eight units. Filmed Entertainment (24% of 2008 sales) produces films and TV shows. Cable Network Programming (24%) consists of channels such as Fox News, Fox Business News, FX, and Fox Sports Network (FSN). Television (21%) runs Fox Broadcasing, Asian television network Star, and 35 individual Fox afflilate stations throughout the United States. Newspapers (14%) owns and opeartes several newspaper assets primarily in Australia, the U.K., and the U.S. Direct Broadcast Satellite Television, or DBS (8%) operates the SKY Italia satellite service in Italy, and owns an equity stake in British DBS BskyB. Magazines/Inserts/Print Advertising (7%) produces marketing pamphlets, coupon inserts, as well as several magazines in Australia and the Weekly Standard in the U.S. News Corp also owns book publisher HarperCollins (3%), one of the largest English language publishers in the world. Finally there is News Corp's growing online properties (less than 1%), which consists primarily of MySpace.com, as well as the IGN video game network, the RottenTomatoes movie review site, and AskMen.com, a men's lifestyle website.
News Corp has been probably the most proactive "big media" company in moving to "new media" sources of revenue, such as satellite, cable TV, and online channels. The company is not afraid to take risks. In 1986 the Fox Television Network was the first new broadcast network in 40 years, and the company also successfully launched Fox News to compete with CNN in the mid-1990's. Reliable cash flows from newspaper, television, and catalog movie assets allow News Corp to invest in new forms of media distribution and emerging markets. Acquisition has played a major role in growth, as the company bought Dow Jones (publisher of the Wall Street Journal) in 2007 and MySpace.com a few years before. With proven ability to produce hits, a strong presence in emerging markets, willingness to take risks, and lack of high-capital assets like cable providers or theme parks, News Corp is well situated to out-grow it's main competitors.
The company enjoys several of the primary moat-building advantages. For one, 20th Century Fox owns the catalog rights to very valuable movie and television properties such as Star Wars, Titanic, The Simpsons, The X-Files, American Idol, and many more. These properties can be milked for almost cost-free profits for eternity through new media distribution, presentation licences, etc. News Corp owns a wide variety of distribution channels which makes it cheap to monetize their media assets, as well as easy to license other 3rd party media. Exclusivity advantages also come into play - there are only 4 major TV networks, and Fox owns valuable sporting broadcast rights such as NFL Football, Major League Baseball, NASCAR, College Football's BCS, and several European sporting leagues. Media is a scale business, where bigger really is better, and News Corp is one of the 3 biggest media corporations in the world. Competitive position is strong.
The biggest risk is also one of the biggest assets: founder, CEO, and Chairman Rupert Murdoch. His family owns 31% of the shares overall, but over 60% of the voting power, effectively putting him in complete control here. It's clear that he is building News Corp as a dynasty, with the heir apparent his son. This presents a potential risk of not having the best person in charge, and lack of accountability if things go wrong. However, Murdoch has proven that he is probably the savviest executive in the media world, and as long as he sits at the helm it is a positive for shareholders. Operationally, media is facing a new frontier where newspaper and television ad rates will likely fall as advertising dollars move online. Digital distribution of content also produces new challenges, such as preventing piracy and developing successful new revenue models. Big media companies also have a history of making disastrous acquisitions (Time Warner selling to AOL is the most famous). Although News Corp has largely avoided this folly, as it moves into "new media" it is a risk worth mentioning.
Rupert Murdoch has taken a small Austrailian newspaper publisher and turned it into one of the largest media conglomerates in the world. His ability and ambition are unquestioned, but he is 77 years old and it is unclear how capable his son James will be when succession takes place. News Corp's executives are lavishly paid, in the neighborhood of $20 million a year, which is not unusual in the glitzy world of media. The company re-incorporated in the U.S. in 2004, and results have been excellent since then, with CAGR in revenue of 8.4%, operating earnings of 13%, and free cash flow of 9.6%. Operating margins have been on a steady rise. News Corp has accelerated share repurchases in the last 3 years, and a recent asset swap with Liberty Media further reduced outstanding shares by 16%, a massive amount. The company is very well run compared to it's main competitors Time-Warner and Disney.
News Corp is in good financial shape. The company enjoys a steady and diversified stream of revenues, allowing it to easily carry a reasonable debt load without worry of earnings falling off a cliff. Coverage ratio is about 8 times. Debt-to-equity is 47%, well below my 80% "worry point". Free cash flow margin is in the 10% range, much better than the primary competitors who have to spend to maintain theme parks or cable companies. Operating margin has been on a steady rise since 2004 and should continue to improve as a larger portion of revenues come from higher margin businesses like cable channels and online ad sales.
Most of the media giants are trading at attractive prices right now as Wall Street wrings it's hands over the general health of the economy, which has a large effect on advertising expenditures. News Corp is the most desirable of these, and the Magic Formula screen has separated it's superior business and management from the rest. Media is a great business for building wide moats, with a huge catalog of endlessly monetizable intangible assets. Take a movie like Star Wars. News Corp can earn a buck from you at original theater release, DVD release, a Blu-Ray replacement for that DVD, endless "special editions", by selling ads while running it on a Fox TV station, by selling it through iTunes, by licensing it to HBO, and so on. And nobody else can have those cash flows... ever! As an added bonus, News Corp has been very pro-active in moving into new media distribution channels, where competitors have been lagging. At this incredibly attractive price, News Corp looks like a huge bargain, and is a Top Buy.
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