News Corp.: Stock Could Be a Bargain, Albeit an Unsavory One
Here's a contrarian value play if you don't have ethical qualms about what, or whom, you invest in. The last couple of weeks have not been the best of times for Rupert Murdoch, his corporate alter-ego, News Corp., or its shareholders. The stock (NWSA) has been pummeled, along with Murdoch's reputation, and while the controversial magnate may not rally much from here in the public's esteem, the stock may.
Allegations of what can only be described as despicable behavior - hacking the phones of numerous people, including a missing child who was later found dead - by the News of the World, a Sunday tabloid in Britain, led News Corp. to shut down the paper in early July, although investigations by the police and Parliament are likely to continue for months.
Then on Wednesday News Corp. announced that it was dropping its bid to buy the 61 percent of British Sky Broadcasting, a leading satellite TV operator, that it does not already own. News Corp. apparently decided, probably with good reason, that Parliament or regulators would forbid the sale or else hold it up for an intolerably long time.
News Corp. stock fell more than 15 percent in the five trading sessions through Tuesday as the scandal unfolded. The inability to complete the BSkyB deal is indeed a blow to News Corp., but the summary execution of the News of the World and the prospect of cutting back other newspaper holdings in Britain - it owns the Sun tabloid and the more up-market Times - may work in the company's favor.
"Perhaps this rebuke will force News Corp. to reconsider its ownership of UK newspapers. We hope this is a turning point for the company's strategy and asset allocation as the ownership of highly inconsequential newspaper assets has forced the dropping of a strategically important asset."
Nomura's analysts also pointed out that News Corp. plans to do something smart with a big chunk of the cash that it had set aside to execute the BSkyB deal - carry out a $5 billion share buyback. As they see it, News Corp. will be buying the stock at bargain prices:
"Despite this latest BSkyB setback, we still see value in News Corp. shares with 36 percent upside. . . . Our valuation did not include any additional BSkyB ownership. We believe investors will begin to shift back to the fundamentals of the company as this bid uncertainty is removed. Currently [News Corp.] is trading at an 11 percent [price-earnings ratio] discount to the market."