Seth Klarman’s investment and gradual divestment in News Corp. follows one of his central tenets and the namesake of his own book, Margin Of Safety. Klarman clearly explains in his book, “A margin of safety is achieved when securities are purchased at prices sufficiently be low underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world. According to Graham [Benjamin Graham], ‘The margin of safety is always dependent on the price paid. For any security, it will be large at one price, small at some higher price, nonexistent at some still higher price.’”
Klarman initially purchased News Corp in the mid 2000’s and would later raise his stake in the 1st quarter of 2009 with the fall in the price of the stock. As the price rose (and margin of safety diminished), Klarman pared back his stake in the company.
News Corp is best known for its film and entertainment business. It owns the Fox network, Fox Sports Net, 20th Century Fox, FX and numerous other cable and television stations. The company also lays stake to a large portfolio of newspapers including the offering of Dow Jones which includes Wall Street Journal, Barrons and Smart Money among others. The New York Post as well as numerous other major English and Australian newspapers are also part of the News Corp empire.
The chart below shows a breakdown of where the $32.7 billion in 2010 sales came from. The revenues from the direct broadcast satellite business come from an Italian company called Sky Italia which the company lays claim to. Sky Italia offers 180 channels to some 4.7 million customers.
News Corp took a hit with its $580 million Myspace purchase it had made several years ago. The social networking site was recently sold for just over $30 million and giving Rupert Murdoch and News Corp. one their more painful lessons.
When Klarman purchased the company in 2009, it was selling near $6 or about a price to earnings ratio of 3 for 2008’s earnings. The company did lose $1.86 a share in earnings for 2009, but it would rebound in 2010 to a profit of $1.39 a share. Much of the 2009 loss stemmed from a one-time impairment and restructuring charge on the order of $9.2 billion or just under 30% of revenues. The business was surely not insulated against the recession as it derives much of its revenue from advertising, which naturally dropped during the recession.
However, the News Corp business is a diversified conglomerate with strong brands ranging from Fox News to the Wall Street Journal so it is easy to see why Klarman saw a good buy in a business selling for a price to earnings of about 3. The company does not hold a significant amount of debt and would likely have been able to maneuver through the recession as it has sustained positive free cash flows for all of the past 10 years.
As the stock has ascended to 16 times earnings it is doubtful Klarman will still find the company a good buy though he still counts the company as his second largest holding. Though it is one of Klarman’s larger holdings he remains a minority holder of News Corp. owning less than .8% of the company. Thus paring back a position in the firm should not materially affect the price if he feels the margin of safety has disappeared.
Disclosure: No Holding in NWSA or NWS