In the past couple of weeks, News Corp (NASDAQ:NWS) has popped up in the headlines several times, and each time with a new announcement regarding strategic changes. For starters, Rupert Murdoch finally gave signs that a succession is on the move, by naming Lachlan Murdoch (formerly chairman and director of Ten Network) as the new non-executive co-chairman of the company and its adjacent Twenty-First Century Fox Inc. (NASDAQ:FOXA). With Lachlan on the board, the company is hoping to expand its reach by investing in technology and especially focusing on the development of its non-newspaper assets. Although the spin-off of its entertainment asset 21st Century Fox undoubtedly put a strain on the firm’s results so far, many investment gurus like Richard Pzena (Trades, Portfolio) and Jim Simons' (Trades, Portfolio) hedge fund still have faith that News Corp has a solid chance at success, and therefore bought the company’s shares last quarter.
- Warning! GuruFocus has detected 1 Warning Sign with NWS. Click here to check it out.
- NWS 15-Year Financial Data
- The intrinsic value of NWS
- Peter Lynch Chart of NWS
Time for a Change
While the company’s news and information service segment has been putting a halt to revenue growth in the past year, due to increasing headwinds and the lack of competitive advantages, 2014 is set to be a transformational year for News Corp. Apart from the cost-cutting initiatives, management has declared that it will be focusing its efforts on redefining its assets by steering its media business to a more digitalized and globalized scale. As such, News UK, one of the company’s subsidiaries, announced its acquisition of the luxury shopping website Handpicked Companies Limited, which the firm will help promote via its newspapers The Times and The SundayTimes. The deal will not only add value to readers, but will also help the company breach into the ecommerce business, which should help gain a broader market base.
Furthermore, while the company fully owns the cable sports channel Fox Sports Australia, in addition to its 50% stake in pay TV and satellite distributor Foxtel, it is set on expanding this asset base in order to increase segment profits. In line with this strategy, News Corp announced last week that it would be entering a partnership with Galaxy Media and Entertainment in Vietnam to represent BallBall. This digital European Football platform, now in the hands of News Corp, will be available via all mobile and connected devices and will allow for users to access exclusive content related to the top five European Leagues. Furthermore, the firm’s book publishing business, Harper Collins, increased its revenue contribution by 40% in the past quarter, consequence of the reduction in headcount and transition to eBooks, which is expected to boost segment profits looking forward.
Still Room for Growth
While News Corp’s information and news business will remain weak, with sales declining by 3% annually for the next five years, the company is placing its bets on its non-newspaper assets and its real estate business REA Group. As such, quarterly EBITDA grew 9% in the media segment, while REA Group’s growing share of advertising expenditure for real estate listings contributed to a 20% increase in EBITDA. Thus, overall EBITDA margins for the next five years are expected to average at 11.4% annually, up from 2010 to 2012’s 10.6% average growth.
Furthermore, the company managed to regain some strength on its earnings and after 2012’s low point of -$3.58 is now sporting an EPS of $0.87. The substantial increase in returns on equity should also be noted, as News Corp struggled to keep its stewardship of shareholders intact. However, the jump from 2012’s -23.56% ROE to a current 4%, in addition to the net margin boost of 5.7% are solid signs that growth is not yet out of the question for this company.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.