The powerful forces now swirling around News Corp. (NWS) shares could potentially whipsaw investors dramatically. On the long side, some investors are taking the position that the company’s tremendous collection of assets around the world is worth somewhere above $24 per share on a breakup of the company. On the other hand, there also seems to be some recognition that the company's in some danger of losing licenses to the scandal and of being broken up in ways that could damage outside investors. In the middle, the company has accelerated by buying back its shares.
It seems to me that investors on the long side of the argument have yet to fully recognize the sea change in attitudes towards this company. In the past, the outside constituencies with influence over the company’s success -- investors and regulators -- typically gave the company the benefit of the doubt in controversy. The reverse is now true. As some of the egregious practices which the company engaged in come to light and the continued questions surrounding, in particular, James Murdoch’s answers to these questions, investors and regulators and indeed the general public now mistrust the company’s every assertion.
On the short side, those who view the phone-hacking fiasco as deleterious to the company’s tremendous collection of assets are equally wrong. The company is at the center of a force five-level media hurricane. It is now payback time after decades of extending large rewards to politicians and others who helped NWS achieve its business ends and equally damaging punishments to those who stood in the way. It has aroused a full-throated chorus of wrath from all sides of the political spectrum. In our view, this too is overdone and will dissipate with time, but not until the revelations come to an end. Who knows when that will be?
Clearly, the scandal will require substantial provisions for the closure of News of yhe World and payments to victims of the hacking. Other provisions yet to be determined are also likely but can’t be estimated. At the same time, the scandal has precipitated the withdrawal of the offer to buy the rest of BSkyB that NWS does not already own. Some news reports also have also mentioned that News International could lose the right to operate BSkyB. Again, nobody can really estimate the likelihood. But the loss of the operating license there could equal $4-6 per share.
Aside from the above direct penalties to earnings, however, we think that NWS will post improving earnings comparisons going forward. We think $18.00 per share is the potential upside from a strong earnings report. Earlier this week, we wrote about the strong demand for advertising time in the so called upfront network market and the five companies -- Disney (DIS), Viacom (VIA), CBS, Scripps (SNI) and Discover (DISCA) -- that we believe will benefit most strongly. NWS should also be boosted by strength in the market--particularly through its US TV operations and the Fox Cable Networks. The scandal, and slow progressions at The Wall Street Journal, will impede earnings gains. But investors are likely to react positively to its fourth quarter earning reports, due out on August 10. The strong comparisons are likely to persist for the next three to five quarters, until the conclusion of the Presidential election in November 2012.
As we see it, the shares will be subject to substantially increased volatility over the next year or more but basically will be going nowhere. The share buyback will probably keep a floor of $14 per share, but nobody knows when the shares will resume their long term upward course. Arguably, it will take a management change of the kind that would have been unimaginable even a couple of weeks ago. Investors and short sellers can expect an event-driven, highly volatile trading environment in NWS shares.