All the recent press News Corp. has received got me to thinking about the company and its long-term prospects. My conclusion is that those prospects are outstanding and that the company represents an excellent investment opportunity for patient investors who are willing to take a long-term view. I believe three businesses in particular will contribute most to the company’s fortunes: 1) the cable programming unit, 2) Fox Interactive Media, and 3) the soon-to-be-acquired Dow Jones.
Cable Programming Unit
The cable programming unit should continue to benefit from the stellar performance of the Fox News Channel. Given the latter’s complete and total ratings dominance over its cable news rivals, I expect that ad revenues and carriage fees will continue to rise for the foreseeable future. More importantly, the impending launch of the Fox Business Channel should, in time, contribute considerably to the unit’s earnings.
Today, CNBC is the clear and undisputed leader in business television, generating operating profits in the neighborhood of $350 million per year for parent company, General Electric. While many industry analysts feel CNBC is in too strong a position to be challenged by Fox, I would remind them that many analysts felt the same way with respect to CNN when the Fox News Channel was launched. I have great confidence that Roger Ailes and his team at Fox will create a successful and profitable business channel which at the very least will rival CNBC and may very well overtake it in the not-too-distant future.
Fox Interactive Media
Although it is currently not profitable, I consider MySpace, which is part of the Fox Interactive Media Unit, to be the crown jewel in News Corp.’s portfolio of companies. Since being acquired by News Corp. in July 2005 as part of the acquisition of Intermix Media, MySpace has experienced tremendous growth, both in terms of number of visitors and revenues. According to a recent report published by comScore, the number of unique visitors reached 114 million in June, up from just over 17.5 million at the time of the acquisition. Meanwhile, revenue at Fox Interactive Media for the fiscal year just ended is likely to exceed $500 million, which may be only a preview of things to come given that revenue at MySpace alone may have already reached a monthly run rate that translates into $1 billion in annual sales. Top line growth at the social networking site should remain strong as a result of an ad sharing deal signed last year with Google that is expected to generate at least $900 million in revenues over the three year term of the agreement.
Clearly, if it hasn’t happened already, MySpace is on the verge of becoming profitable and, based on management’s own margin estimates, I envision this unit contributing as much as $200 million in operating profits starting in fiscal 2008 and increasing that contribution at a very healthy rate for years to come.
Moreover, according to recent press reports, News Corp. has held discussions with Yahoo regarding a swap of MySpace in return for a 25% to 30% stake in the Internet portal. While I don’t expect the deal to happen because I believe Rupert Murdoch realizes that 100% ownership of MySpace is better than a minority position in Yahoo, the implication is that MySpace could be worth as much as $8 to $10 billion today, a roughly fifteen to twenty fold increase from the $580 million News Corp. paid for all of Intermix just two years ago. Yet given the relatively stagnant price of News Corp.’s shares since the Intermix acquisition, this massive increase in value does not appear to be fully factored into the share price. Eventually it will be.
The prevailing view among many investors and media industry analysts is that News Corp.’s interest in Dow Jones can be traced to the impending launch of the Fox Business Channel. The thinking goes that having the Wall Street Journal in the fold would help to jump start the new cable network by instantly lending it a great deal of credibility. While I envision the Journal being a valuable asset with respect to the new business channel, I do not foresee it being such an asset for at least five years. That is because CNBC has an exclusive agreement with Dow Jones through 2012 for use of the Wall Street Journal name and news reports in its broadcasts. It seems highly unlikely that the powers-that-be at CNBC would be foolish enough to allow News Corp. to buy out the agreement since doing so would provide such a valuable head start for CNBC’s new competitor at Fox.
While Dow Jones may not be of value today to the new Fox Business Channel, I view that as being almost immaterial with respect to the overall benefits that News Corp. will reap from its ownership of The Wall Street Journal. As I’ve written previously, the Journal is one of the world’s truly iconic journalistic brands, and under News Corp.’s auspices I envision it becoming a highly profitable internet business. I am sure Murdoch understands that there are only so many business and investment web sites that people will choose to visit in search of financial information and having a robust, advertiser-supported (as opposed to the current subscription model) site that combines the Journal’s articles and editorial content, not to mention its trustworthiness, with television quality video will draw visitors by the millions, maybe even the tens of millions.
At a $5 billion plus price tag, Murdoch has placed a new media, Google-type valuation multiple on Dow Jones because he realizes that properly managed it can be a highly successful new media business with a valuation that could well exceed its purchase price in fairly short order.
In summary, I believe it is quite possible to see a jump of at least $400 million to $500 million in News Corp.’s operating earnings in the next few years as a result of the launch of Fox Business Channel and the transition to profitability at MySpace. When you couple that with the potential profits that a reconfigured Wall Street Journal web site might generate, it would not surprise me to see News Corp.’s annual operating profit jump by upwards of $1 billion by fiscal 2009 or 2010 as a result of the growth in these three businesses alone. A commensurate jump in the share price seems almost sure to follow.
For purposes of full disclosure, I do not currently own any shares or other securities of News Corp. but anticipate purchasing shares from time to time beginning as early as this week.