Conservative investor Donald Yacktman (Trades, Portfolio) is not known for rearranging his portfolio very often, no matter the changing winds of the market. The recent several quarters, however, saw a notable shift in his top holdings: the adjustment of his top holding to his second largest position and the elimination of its spin-off.
Yacktman began building a position in News Corp. (NWSA) in late 2009 when the price was in the mid-single digit range. It held Yacktman’s top spot in his now $10.95 billion Yactkman Fund portfolio since first quarter 2010, when it represented 10.2% of the total value. In that quarter, it trumped next-largest holdings PepsiCo Inc. (PEP), Coca-Cola Co. (KO) and ConocoPhillips (COP).
In 2009, Yacktman Asset Management’s Jason Subotky told Investor Insight News Corp’s draw for the firm, emphasizing its cable network programming unit:
“The basic thesis is that the market is mistreating News Corp, as it is most other media companies. Its stock trades about half of what it was at the beginning of 2007, but its business mix and growth prospects are now much better than they were back then.
News Corp has eight different operating units, which makes it complicated for people to analyze. The most important business by far is cable network programming, including Fox News, FX, Fox Sports and the National Geographic Channel. Revenues and earnings in this business have more than doubled over the past five years, driven by increasing subscriber fees from cable and satellite companies, as well as higher rates on the advertising side. Even with that performance, we see plenty of further upside. Fox News, for example, has a higher viewership than its top three competitors (CNN, Headline News and MSNBC) combined. These viewership increases give News Corp significant negotiating power when carriage-fee contracts come up for renewal.”
In his 2012 interview with GuruFocus, Yacktman echoed those views, strongly believing in the growth prospects of the cable news business:
“[Mr. Yacktman]: We studied News Corp for many years before purchasing shares in 2008 below $10 per share. We used the challenges last year to purchase additional shares. We got to know the company especially well as it was an important component of value for Liberty Media (LCAPA), one of our larger portfolio positions several years back. News Corp is one of the few newspaper oriented companies to successfully transition to newer media. Today the cable and television content divisions are where the most significant value exists. On a stand-alone basis, the cable content unit has been growing pre-tax profits at more than 25% a year for more than a decade, a claim few other large businesses or business units can make.
News Corp generates significant free cash flow and sells at a low multiple of free cash flow. The cable content business offers significant predictability with more than 2/3rds of the unit's revenues from predictable monthly fees. News Corp also has significant value in non-core investments which we think the company does not get full credit for in its share price.
We think News Corporation has significant growth opportunities in the future. The core cable content should experience solid growth in the U.S. and especially overseas where pay television and content have much lower penetration and consumption rates than the United States. In the last few years, News Corporation and other network television companies successfully negotiated monthly transmission fees. The monthly payments will be increase earnings and create more predictability for The Fox Network and Fox television stations.”
At its peak in the first quarter of 2012, the Yacktman Fund (Trades, Portfolio)s position in News Corp stood at 33.4 million shares, a full 8.82% of the company’s shares outstanding. Later that year, on June 28, News Corp announced it would separate its publishing and media and entertainment businesses into two publicly traded companies. One company would be a global publishing enterprise incorporating a number of print, digital and information services, such as Dow Jones, Wall Street Journal, HarperCollins, and others. The second would consist of global media and entertainment assets such as Fox Broadcasting, Twentieth Century Fox Film and others.
The new companies officially completed their separation about a year later in June 2013, and began trading under their new stock symbols on July 1. The cable and entertainment company became known as 21st Century Fox (FOXA) and the print company kept the name News Corp (NWSA), with a new symbol.
Under the separation agreement, News Corp shareholders received one share of common stock in the new company, Twenty-First Century Fox, for every share of the original company they owned. Consequently, in the third quarter, Yacktman’s portfolio showed a new name in the top holding: Twenty-First Century Fox, at 31.4 million shares, and only 1.36% of the company’s shares outstanding.
However, Yacktman and his associates were quick to back out of the print company. In third quarter 2013, they decided to slash the holding by 82.53%, selling 26,203,000 shares. Since the new company began trading, it has gained 6% to trade around $16.76 a share on Tuesday. Twenty-First Century Fox shares gained 8.6% since the split to trade around $31.92 a share.
Then, in the fourth quarter, Yacktman sold out of his entire remaining News Corp position in his Focus Fund, and reduced the position in his Yacktman Fund (Trades, Portfolio) a further 66%, retaining just 1,888,000 shares.
“This is probably an ice cube, the publishing assets. The one wild card in here that I would like to see the details on is the Dow Jones part and the Wall Street Journal part, because I see a lot of spillover potentially with that being tied into Fox Business News. It is the one publishing piece that I’ve seen that has successfully converted to an electronic format,” he told CNBC upon news of the split.
In News Corp’s fiscal first quarter results, its first as the new News Corp, the company reported a 3% year-over-year decline in revenues to $2.07 billion, due primarily to lower ad revenue and the sale of Dow Jones Local Media Group. EBITDA increased 58% to $141 million, and net income was $38 million, compared to a net loss of $83 million the previous year. Its biggest EBITDA increase was seen in its Digital Real Estate Services segment, which increased 26%, while Book Publishing was up 8%. Its largest declines in revenue were in Other, down 21%, News and Information Services, down 10%, and Book Publishing, down 7%.
News Corp has cash of $2.69 billion, and total current liabilities totaling $2.65 billion, as of Sept. 30, 2013.
It also has a P/B ratio of 0.8 and P/S ratio of 1.1.
Twenty-First Century Fox reported fiscal first quarter revenue of $1.06 billion, an 18% increase year over year, due mostly to growth in its cable network programming, filmed entertainment and television segments. Net income totaled $1.26 billion, down from $2.29 billion the previous year.
The company saw revenue improvements in each of its segments’ revenue except for Other, Corporate and Eliminations, compared to the previous quarter. It also declared a dividend of $0.125 per Class A and Class B share, a 47% increase from the prior-year semi-annual dividend of the former News Corp.
Fox ended the quarter with $6.68 billion in cash, and total current liabilities of $8.9 billion.
Its P/E ratio is 12.3, P/B ratio is 4.3 and P/S ratio is 2.8.
Yacktman also reduced his position in this company, though to a far less degree. He reduced 2.36 million shares in the fourth quarter, 7.52% of his holding, giving his fund a remaining 29.04 million shares, or 1.26% of the company. The reduction adjusted the holding to be his second largest, under PepsiCo.
After a sharper reduction in his Yacktman Focus Fund, the position dropped to his third largest holding, under PepsiCo and Procter & Gamble Co. (PG).