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Mark Yu
Mark Yu
Articles (375)  | Author's Website |

News Corp. Shows Strong Cash Flow Generation

Company undervalued but accompanied by blue sky elements

News Corp. (NASDAQ:NWS)(NASDAQ:NWSA), the $8 billion diversified media and information services company, reported minimal revenue decline year over year at (-)0.12% to $6.06 billion and unappealing $309 million losses in its third quarter compared to $89 million in profits (1.5% margin) in the year earlier period.

News Corp. recorded slightly higher selling, general and administrative expenses at 0.9% but more importantly had a $409 million impairment charge of which $310 million came from the company’s assets at the Australian newspapers.

"In the third quarter, we saw particular progress in our quest to be more digital and global while there was tangible improvement in operating efficiencies. We posted solid revenue growth and substantial earnings growth, highlighted by momentum in Digital Real Estate Services, where realtor.com® continued to expand traffic, revenue and profitability.

"At News and Information Services, while print advertising remains volatile, we saw some moderation this quarter. Overall, the segment was a source of growth this quarter – in both revenues and profitability – driven by, in particular, the robust performance of in-store product at News America Marketing, digital subscriber gains of more than 300,000 at the Wall Street Journal and the benefits of ongoing cost control.

"The quarter was also characterized by an intensifying social and commercial debate over the dysfunctionality of the digital duopoly and the lack of transparency in audience and advertising metrics. With brands in search of authenticated audiences and trusted advertising environments, we firmly believe that our mastheads offer veracity and value, and we are rapidly developing a new digital ad platform to offer clearly defined demographics from across our range of prestigious properties." – CEO Robert Thomson

Valuations

News Corp. recorded losses in the recent three quarters of its trailing 12 months of operations resulting in no trailing price-earnings (P/E) ratio. Nonetheless, the company traded lower than its peers in terms of price-sales (P/S) multiple with 0.95 times vs. the industry median of 2 times. In addition, News Corp. traded lower than its book value at 0.71 vs. 1.89 times its industry median.

The company also had a trailing dividend yield of 1.47% and 0% payout ratio.

Average fiscal 2017 estimates indicated forward multiples 0.97 times and 36.7 times.

Total returns

News Corp. has outperformed the broader Standard & Poor's 500 index so far this year having generated total gains of 19.3% vs. 11%.

News Corporation

According to filings, News Corp. was originally organized on Dec. 11, 2012 in connection with its separation from Twenty-First Century Fox (NASDAQ:FOX)(NASDAQ:FOXA).

News Corp. is a global diversified media and information services company focused on creating and distributing authoritative and engaging content to consumers and businesses throughout the world.

The company comprises businesses across a range of media, including news and information services, book publishing, digital real estate services, cable network programming in Australia and pay-TV distribution in Australia, that are distributed under some of the world’s most recognizable and respected brands including The Wall Street Journal, Dow Jones, The Australian, Herald Sun, The Sun, The Times, HarperCollins Publishers, FOXSPORTS Australia, realestate.com.au, realtor.com, Foxtel and many others.

News Corp. delivers its premium content to consumers across numerous distribution platforms consisting not only of traditional print and television but also through an array of digital platforms including Web sites, applications for mobile devices and tablets, social media and e-book devices.

The company’s diversified revenue base consists of advertising sales, recurring subscriptions, circulation copies, licensing fees, affiliate fees, direct sales and sponsorship sales.

In 2016, 47% of News Corp.’s revenue was generated in the U.S. and Canada (2.9% year over year from 2015), 30% in Australia (8.6% decline) and 22.6% in Europe (5.5% drop).

The company has five reporting segments: (i) News and Information Services; (ii) Book Publishing; (iii) Digital Real Estate Services; (iv) Cable Network Programming; and (v) Other. News Corp. also owns a 50% stake in Foxtel, the largest pay-TV provider in Australia.

News and Information Services

According to filings, the company’s News and Information Services segment consists primarily of Dow Jones, News Corp. Australia, News UK, the New York Post and News America Marketing.

This segment also includes Unruly Holdings Ltd., a leading global video advertising distribution platform, and Storyful Ltd. a social media content agency that enables News Corp. to source real-time video content through social media platforms.

In the recent three quarters, revenue in News and Information Services declined by 3.4% year over year to $3.79 billion (62.5% of total revenue) and generated a segment EBITDA (1) margin of 8.2% vs. 1.4% in the year-prior period.

According to filings, the revenue decrease was mainly due to lower advertising revenues and negative impact from foreign currency fluctuations. In addition, the increase in the segment’s EBITDA was primarily due to the absence of the $280 million NAM Group settlement charge in the prior year quarter.

Meanwhile, the division would still reflect a flat year-over-year growth to $54 million should the charge be reflected.

Book Publishing

The company’s Book Publishing segment consists of HarperCollins Publishers, the second-largest consumer book publisher in the world based on global revenue, with operations in 18 countries.

HarperCollins publishes and distributes consumer books globally through print, digital and audio formats. In addition, HarperCollins owns more than 120 branded imprints, including Avon, Harper, HarperCollins Children’s Books, William Morrow, Harlequin and Christian publishers Zondervan and Thomas Nelson.

In the recent months of operations, revenue in the division grew 1.3% year over year to $1.23 billion (20% of total sales) and generated a segment EBITDA margin of 13% vs. 11% in the same period last year.

Digital Real Estate Services

The company’s Digital Real Estate Services segment consists primarily of its 61.6% interest in REA Group (ASX:REA) and its 80% interest in Move Inc. (FRA:HMZN). The remaining 20% interest in Move is held by REA Group.

Further, Move primarily operates realtor.com, a premiere real estate information and services marketplace, under a perpetual agreement and trademark license with the National Association of Realtors.

Digital Real Estate Services segment also includes DIAKRIT International Ltd., a digital visualization solutions company that enables homeowners to see the potential in their future living environment while also helping agents and developers generate more buyer inquiries and accelerate their property sales processes.

In the recent nine months of operations, revenue in the segment grew 15.9% year over year to $687 million (11% of total sales) and registered a segment EBITDA margin of 34% (most profitable) vs. 28.5% in the year-earlier period.

Cable Network Programming

The company’s Cable Network Programming segment consists of FOXSPORTS Australia, the leading sports programming provider in Australia based on total viewing hours as of June 2016.

FOXSPORTS Australia is focused on live national and international sports events and provides featured original and licensed premium sports content tailored to the Australian market, including live sports such as National Rugby League, the domestic football league and international cricket as well as the Australian Rugby Union.

The division’s revenue in the recent months of operations grew 5% year over year to $354 million (5.8% of sales) and had margins of 28% vs. 30% in the year-earlier period.

Sales and profits

In the past three years, News Corp. registered revenue decline average of (-)2.3%, profit decline average of (-)29.3% and profit margin average of 1.06%.

Cash, debt and book value

As of March News Corp. had $1.9 billion in cash and cash equivalents and $273 million in debt with debt-equity ratio 0.02 times vs. 0.03 times in the year-prior period. The company’s debt fell by $96 million year over year while equity also dropped by $507 million.

Of News Corp.’s $14.9 billion assets 41.5% in the period were identified as goodwill and intangible assets while book value has dropped 4.4% year over year to $11.1 billion.

Cash flow

In the recent nine months of operations, News Corp.’s cash flow from operations dropped by 58% year over year to $219 million. In addition to lower profits, the company recorded cash outflows in "Other, net," receivables and its NAM Group settlement.

In the first quarter of this year, News Corp. settled a lawsuit (for about $280 million in total)that was first brought in 2012 (prior to its separation – see above) led by Dial and Kraft Heinz (NASDAQ:KHC) alleging the company broke antitrust laws with exclusionary contracts and kept prices for its coupon clients artificially high for years, reaching back as far as 1997 (Business Insider). Prior to this settlement, News Corp. had already lost several rounds of litigation over alleged antitrust activities in the grocery coupon business, and it has cost the company $656 million in settlements.

Capital expenditures for the company’s recent three quarters of operations were $168 million leaving it with $51 million vs. $343 million in the year earlier period. News Corp., nonetheless, provided 1.8 times this free cash flow in dividend payouts to shareholders.

In the past three years, News Corp. allocated 15% of its free cash flow in payouts and share repurchases. In fiscal 2016, the company bought back 3.1 million of its shares outstanding at an average price of $12.65 vs. $13.57 at the time of writing.

In review, News Corp. accumulated $1.62 billion in free cash flow, paid out $272 million in dividends and share repurchases and raised $421 million in borrowings net repayments and costs in the past three fiscal years.

Conclusion

News Corp.’s major revenue generator – News and Information Services (62.5% of sales) – has yet to show a solid turnaround albeit having exhibited 2.6% year-over-year growth in the third quarter 2017 alone. In review, the segment generated $6.15 billion in revenue in fiscal 2014 and dropped to $5.34 billion in fiscal 2016.

Meanwhile, News Corp.’s other businesses showed steady growth rate figures. The company’s Digital Real Estate Services (11.3% of sales in recent three quarters vs. 9.8% year earlier), in particular, has impressively recorded high revenue growth rates and most profitable (company defined) figures in recent years.

The company also is cash rich with nearly negligible debt but accompanied with good amount of blue sky elements (goodwill and intangibles) at 41.5% of assets. News Corp. also has kept very prudent cash flow allocation while having paid dividends and performed share buybacks as well in recent years.

Nine analysts have an average price target of $14.83 per share vs. $13.57 at the time of writing. Using three-year P/S multiple and revenue growth averages followed by a 30% margin indicated a value of $9.1 per share.

In summary, News Corp. shares are a hold.

Notes

(1) Company filings.

Segment EBITDA is defined as revenues less operating expenses, selling, general and administrative expenses and the NAM Group settlement charge. Segment EBITDA does not include: depreciation and amortization, impairment and restructuring charges, equity (losses) earnings of affiliates, interest, net, other, net, income tax (expense) benefit and net income attributable to noncontrolling interests. Segment EBITDA may not be comparable to similarly titled measures reported by other companies, since companies and investors may differ as to which items should be included in the calculation of Segment EBITDA.

Segment EBITDA is the primary measure used by the company’s chief operating decision maker to evaluate the performance of and allocate resources within the company’s businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the operating performance of each of the company’s business segments and its enterprise value against historical data and competitors’ data, although historical results may not be indicative of future results (as operating performance is highly contingent on many factors including customer tastes and preferences).

Disclosure: I do not have shares in any of the companies mentioned.

About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

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