I am not generally a fan of traditional print and publishing companies as investments. I think the industry has been slow to adapt to the internet revolution and even slower to monetize it. After Newsweek was sold last year for one dollar, one wonders if many of the traditional holdings in these companies are worth anything at all. I am still not sure I would classify News Corp (NASDAQ:NWS) as an investment, but given recent events I would definitely consider it as a trade.
Barclays Plc and Gabelli & Co. this week estimate that the company is trading at a 50% discount to the cumulative worth of its separate business units. Many blame this discount on the company’s 80-year old CEO, Rupert Murdoch, and a fear that the often politically outspoken Australian will make decisions not in keeping with shareholder interests. I would argue that much of the discount is a function of the industry and the sheer difficulty in managing the world’s second largest media empire.
This discount alone would not put the stock on my radar. What appeals to me is the current hit the stock has taken due to the News of the World scandal. The shares have been pummeled recently to the tune of 17.9% since July 5, and almost 5% today. As horrifying as the details have been, and as badly as News Corp has managed the publicity, this scandal does not materially affect the market value of the company. Granted, Murdoch has had to abandon his takeover of British Sky Broadcasting, but it will not force the company to significantly alter its strategy. The company will report fourth quarter earnings on August 10, and class A shares currently trade with a 13.3 price-to-earnings ratio. Before last quarter, the company had beaten the consensus earnings estimate for seven consecutive quarters. For comparison; Disney (NYSE:DIS), the world’s largest media conglomerate currently trades with a 16.9 price-to-earnings ratio and similar fundamentals.
Shares may face increased pressure as Murdoch et al. testify in the U.K. Parliament Tuesday and what will likely wash ashore here in the U.S. over possible attempts to hack into the phones of Sept. 11th victims. News Corp has not been explicitly linked to any of News of The World’s actions, but has been proven guilty by association. Even if the legal proceedings do escalate, I am confident that the company can resolve the issue. Despite the differences in legal systems around the world, one thing is fairly consistent. Billionaires tend to win in court.
Traders should plan to accumulate shares over a period rather than one buy order. Implied volatility for the call options has jumped, making option plays a possibility as well. The sale of a covered call with an August strike price of $15 yields a 7.3% cash payment and a 2.2% downside cushion on the stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.