News Corporation (NWSA), founded in 1922, is a leading global media company. The company has a diversified collection of media enterprises. New York-based company operates in six industry segments: Television, direct broadcast satellite television, publishing, cable network programming, filmed entertainment, and other. The company services primarily in the United States, the United Kingdom, Continental Europe, Australia, Latin America, and Asia.
As of Sept. 2, News stock was trading at $16 with a 52-week range of $12.88-18.35. It has a market cap of $41.4 billion. Trailing 12-month P/E ratio is 14.3, and forward P/E ratio is 9.7. P/B, P/S, and P/CF ratios stand at 1.4, 1.2, and 9.3, respectively. The three-year annualized revenue and EPS growth stand at 0.4% and -14.3%, respectively. Operating margin is 13.6%, and net profit margin is 8.2%. The company has a low debt-to-equity ratio of 0.5. News has a yield of 0.9% for its shareholders.
News Corp. has a three-star rating from Morningstar. While its trailing P/E ratio is 14.3, it has a five-year average P/E ratio of 8.4. Out of 30 analysts covering the company, 17 have buy, six have outperform, four have hold, one has underperform, and one has sell ratings. Wall Street has diverse opinions on News Corp.'s future. The bottom line is -6.6% growth, whereas the top-line growth estimate is 41.2% for the next year. Average five-year annualized growth forecast estimate is 9.7%.
In this article, the 25th in a never-ending series, I will show a step-by-step calculation of News Corp.’s fair value using some discounted earnings plus equity model.
Discounted Earnings Plus Equity Model
This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:
V = E_{0} + E_{1 }/(1+r) + E_{2 }/(1+r)^{2} + E_{3}/(1+r)^{3} + E_{4}/(1+r)^{4} + E_{5}/(1+r)^{5 }+ Disposal Value
V = E_{0} + E_{0 }(1+g)/(1+r) + E_{0}(1+g)^{2}/(1+r)^{2} + … + E_{0}(1+g)^{5}/(1+r)^{5} + E_{0}(1+g)^{5}/[r(1+r)^{5}]
The earnings after the last period act as a perpetuity that creates regular earnings:
Disposal Value = D = E_{0}(1+g)^{5}/[r(1+r)^{5}] = E_{5} / r
While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.
News Corp.’s Valuation
Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate. Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $1.14 along with the mean estimate of $1.67 for the next year.
E_{0 }= EPS = ($1.14 + $1.67) / 2 = $1.41
Wall Street holds diversified opinions on News Corp.’s future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 9.7%. Book value per share is $11.23.
The rest is as follows:
Fair Value Estimator | ||
V0 | E_{0 } | $1.41 |
V1 | E_{0 }(1+g)/(1+r) | $1.39 |
V2 | E_{0}((1+g)/(1+r))^{2} | $1.37 |
V3 | E_{0}((1+g)/(1+r))^{3} | $1.36 |
V4 | E_{0}((1+g)/(1+r))^{4} | $1.34 |
V5 | E_{0}((1+g)/(1+r))^{5} | $1.32 |
D | E_{0}(1+g)^{5}/[r(1+r)^{5}] | $12.04 |
BV | Equals | $11.23 |
Fair Value Range | Lower Boundary | $20.23 |
Upper Boundary | $31.46 | |
Potential | 96.62% |
I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my five-year discounted-earnings-plus-book-value model, the fair-value range for News Corp. is between $20.23 and $31.46 per share.
As of Sept. 2, News Corp. was trading at a price of $16. I like News Corp. as a company. It is distributing top-quality entertainment, news, and sports around the world. The company has well-organized and diversity services of media. I see great growth potential, as well. Unfortunately, the market does not seem to appreciate the company’s growth potential. The current price of $16 indicates the stock is deeply undervalued. Based on my FED+ fair value estimate, News is cheaper than my fair-value range. The stock has almost 100% upside potential to reach the upper boundary of its fair value range.
O – Metrix Confirmation
If the math above looks too complicated for you, try estimating the fair value using the O-Metrix as such:
O-Metrix = [(Dividend Yield + Growth Estimate) / (P/E Ratio)] * 5
- Dividend Yield: Higher is better.
- EPS Growth: Higher is better.
- P/E Ratio: Lower is better.
The back-testing of this valuation technique on 40 large-caps shows that O-Metrix works very well over the long-term, such as five years. I am also continuously checking on specific sectors, and the formula works very well so far.
What is the O-Metrix Score?
- News Corp. has a yield of 0.9%. Therefore the yield is 0.9.
- Growth estimate is the same as the discounted earnings model and is equal to 9.7%.
- Since we are at the middle of the year, taking the average of ttm (14.3) and forward (9.7) P/E ratios will smooth the results. Thus, the average P/E ratio to be used in the model is 12.
O-Metrix = [(9.7 + 0.9) / (12)] * 5 = 4.42
Depending on the benchmark chosen, the market has an O-Metrix score range between 4 and 5. News Corp.'s O-Metrix score of 4.42 is in the higher-than-average fair-value range. Back-testing of this ranking system shows that companies with higher-than-average O-Metrix scores beat the market with lower volatility. At a price of $16, the company is trading within the C-Grade, average-return zone.
Summary
News Corporation's stock has always been priced at a discount in contrast to its high growth potential. The average P/E ratio in the last five years was 8.4. However, it is trading with a higher P/E ratio of 14.3 and forward P/E ratio of 9.7. Although its P/E ratios higher than the past, both are below the market. The stock also has a low PEG ratio of 0.92. With a profit margin of 9.42%, NWSA offered the 0.9% dividend yield last year. In the last five years, annualized EPS growth was 5.47%. With a market cap of $41.4 billion, I expect the growth to keep its pace.
Its price to book ratio of 1.5 and price to sales ratio of 1.3 are below the market. The stock has also pretty low total debt/equity ratio of 0.5. For the long-term, News Corp. has great market-beating potential. Analysts agree with me. Their mean target price estimate is $20.59. The stock has 96.62% upside potential based on 9.7% EPS growth estimate. I think the current price offers a profitable entry point
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.