A Closer Look At News Corp’s Valuation

We have maintained our long-term price estimate for News Corporation (NASDAQ: NWSA) at $14, which is slightly lower than the current market price. Our price estimate is based on expected 2020 earnings of 32 cents and a price to earnings multiple of 43.8x.

We have summarized our forecasts in our interactive dashboard on News Corp’s Valuation where we detail some of the key steps in identifying News Corp’s valuation sensitivity to changes in its segment revenues, net income margin, and valuation multiple.

We arrive at the stock price estimate for News Corp as:

Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple

#1. Estimating News Corp’s Total Revenues:

Total Revenues have increased from $8.1 billion in 2016 to $10.1 billion in 2019 but could decline 3% to $9.7 Billion in 2020.

• NWSA added over $2 billion to its revenue base from 2017 and 2019, led by sharp growth in the Subscription Video Services and Digital Real Estate Services segments.
• Inorganic growth strategies, such as important business combinations – Foxtel and FOX Sports – along with key acquisitions – Smartline, Hometrack, and Opcity – led to healthy revenue growth in recent years.
• However, revenue is expected to decline by 3% to $9.7 billion in 2020, due to lower print advertising revenue and book sales. Also, a weaker Australian dollar and the soft housing market could negatively impact the company’s revenues.

Our Interactive Dashboard Analysis on News Corp’s Revenues, Provides An In-Depth View Of The Company’s Revenues.

#2. Deriving News Corp’s Net Income:

Net Income increased sharply from -$1.5 billion in Fiscal 2018 to $0.2 Billion in Fiscal 2019, and we expect it to be around similar levels in 2020.

Net income margin increased sharply from -16.8% in FY 2018 to 1.5% in FY 2019, primarily due to lower equity losses of affiliates resulting from the absence of the $957 million non-cash write-down of the carrying value of the company’s investment in Foxtel recognized in 2018. Also, there were lower impairment and restructuring charges resulting from the absence of non-cash impairment charges related to the impairment of goodwill and intangible assets at the News America Marketing reporting unit, and at the FOX SPORTS Australia reporting unit.

Net income margin is expected to see only a marginal improvement in the near term, on the back of lower operating expenses, and restructuring and impairment cost.

#3. Determining News Corp’s EPS:

EPS has grown from -$1.27 in FY 2017 to $0.26 in FY 2019, and we estimate it to grow marginally to $0.32 in FY 2020.

#4. Estimating News Corp’s Share Price:

Our Price Estimate of $14 For News Corp’s stock is based on our Detailed Valuation Model and implies a 43.8x P/E Multiple on expected FY 2020 EPS of $0.32.

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