Is A Divided News Corp. Worth More than the Sum of its Parts?
Rupert Murdoch seeks to realize full value of News Corp.’s assets through the company’s split – will it work?
Rupert Murdoch and his board of directors have come up with the most convincing way yet to make investors warm up once more to the shares of scandal-tarnished News Corp. (NWSA.O) with his plan — now official — to split the company into two with its entertainment assets (including the Fox broadcast television network) in one part and its publishing assets (such as The Times of London and The Wall Street Journal) in the other. The move — first disclosed earlier this week — triggered a sharp rally in the stock price, which is some 10% above the level where it began the week.
Could the News Corp. directors finally have found a way to address the infamous “Murdoch discount”? As calculated by Reuters Breakingviews last year at the height of the phone-hacking scandal that triggered a Parliamentary inquiry in Britain, the combination of that scandal and what analysts increasingly viewed as erratic business decision making and sub-par governance (there’s no clear succession plan, and the company’s board gets low marks for independence on the part of governance activists) meant that the company traded as much as 30% below the value of its assets. An updated calculation published this week by Breakingviews shows that it’s now trading within a whisker of that fair value — albeit still at a discount to peers like Time Warner (TWX.N). If you want to play around with the valuations, or update the calculations based on a later closing price, click the image below for the Breakingviews calculator that you’ll need.
In the wake of this major strategic initiative, does News Corp. now emerge as an attractive stock? Not necessarily, StarMine models suggest. Despite the company’s decision to boost its dividend payout to investors last year it still has a relatively low yield of only 0.8% based on next year’s expected dividend payment. That in turn contributes to its low score of only 26 on the StarMine Relative Valuation (RV) model, which combines several ratios to come up with a measure of a given stock’s attractiveness compared to its peers across industries, sectors and regions. The stock’s score of 63 on the StarMine Intrinsic Value Model is more impressive but the stock already trades at nearly $22, not that far from its StarMine estimated value of $29.77 a share.
Moreover, there are few signs of anything that might trigger another sharp rally. The StarMine Analyst Revisions Model (ARM) gives News Corp. a score 42, signaling that analysts aren’t united in their views of the stock, with some cutting their estimates for earnings while others raise them. Certainly, that kind of score doesn’t make it likely that a positive earnings surprise will propel the share price higher still. The company’s earnings quality, as measured by the StarMine Earnings Quality (EQ) model, is also ho-hum; scoring 61 on this model signals that News Corp. is generating profits that are appear reasonably sustainable, but not impressively so. And while Murdoch himself has accumulated an impressive roster of foes of all stripes, from British members of parliament to a man who hit him in the face with a pie while he was en route to testify in the phone-hacking case, these don’t seem to include very many short sellers.
At the present moment, 1.8% of shares are sold short, and StarMine’s Short Interest (SI) model gives News Corp. a score of 77; the company hasn’t become a target for “smart money”. Stocks that shorts identify as being mispriced or fundamentally flawed in some way tend to underperform those they choose to ignore. While not actively bullish, this at least means that there is one less thing for News Corp. investors to worry about actively. However the relatively low proportion of short sales means that the odds of a short squeeze driving the share price higher are low; the StarMine Short Squeeze indicator stands at 40. This unique measure combines analysis of the number of short positions and indicators of volatility, with those stocks with a rating closer to the top level of 100 most likely to experience such a squeeze a big upward movement as a result of short sellers scrambling to get out of their bearish positions, as the stock moves against them and causes them to lose money.
The one StarMine measure that does support a higher share price for News Corp. is the StarMine SmartHoldings model, on which the company — as it stands today — scores 91 out of a possible 100. This signals that News Corp. looks a lot like other companies that institutional investment managers are interested in adding to their portfolios, based on certain fundamental characteristics such as price/earnings ratios and debt/equity ratios. Such a high score suggests that News Corp. now is popping up on a list of potential investment ideas among a number of buy-side institutions these days — whether or not they choose to hit the “buy” button, or to pass up the opportunity to invest, may well depend on how they view the company’s prospects as two stand-alone businesses. Will investors who find the current company’s fundamentals intriguing agree with Murdoch’s insistence that his newspaper assets are undervalued, despite the relatively low margins the business currently commands? And will they have faith that the high growth rate of Fox’s cable television channels can be mirrored by its broadcast and satellite television divisions or by its movie production company?
It will take a year or so to complete the split. We’ll come back when that’s done, and give you some insight into the new companies as they begin trading on a stand-alone basis.