Brokers Recognising Improving Conditions For News Corp

This story features NEWS CORPORATION. For more info SHARE ANALYSIS: NWS

By Chris Shaw

With News Corporation ((NWS)) shares currently trading at around half the level of their highs of 2007, the stock is causing brokers to have another look at the numbers and those to have done so recently like what they see. GSJB Were today listed News as one of its top 10 stocks for 2010, while yesterday Deutsche Bank upgraded its rating to Buy from Hold.

For GSJB Were, the story starts with recent share price appreciation of peer media stocks in both the US and Australia, as this has caused the broker to mark-to-market its earnings forecasts for the company. The changes also reflect an improvement in advertising markets, as industry feedback suggests scatter pricing has increased to 20-30% above upfront price levels.

Management at News has been aware of this and already lifted earnings guidance but in GSJB Were’s view there are more upgrades to come, so it sees its earnings per share (EPS) forecasts of US83.1c for FY10 and US105.5c for FY11 as likely to prove conservative.

The revised EPS forecasts of GSJB Were compare to Deutsche Bank at US87c and US101c, up from US86c and US97c previously to reflect a strong quarter for US television and newspaper earnings, while Macquarie is forecasting US97.3c and 128.1c respectively.

Deutsche bank notes its new numbers are above current guidance but it sees this as reasonable given the rebound in ads, solid network TV ratings and strong cable net growth. Deutsche also sees scope for longer-term growth opportunities via new revenue streams such as securing payment for retransmission fees and for online news content. To reflect this the broker is forecasting double-digit EPS growth for the next few years.

Even on its new numbers, Deutsche estimates the stock is trading on an adjusted EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple at the bottom of the 5.7-7.4 times range of its peers, while its P/E multiple is also at the bottom of the 12.4-16.0 times range of its US peers.

Even in relation to its Australian peers, Deutsche sees value as on the analysts’ numbers valuation is in the middle of the 11.5-22.4 times P/E range for the media sector, this despite their view News has a superior mix of businesses in its portfolio. As well, GSJB Were suggests capital management is now a matter of “when” and not “if” as the current significant cash reserves will at some point be seen as an inefficient use of capital given an expected recovery in the US economy. It estimates a buyback of as much as US$2.0 billion could comfortably be announced sometime in 2010, which would also be positive for earnings per share.

In the short-term, the major impact on earnings for News is likely to come from the release of the 3-D movie Avatar, which Macquarie notes is the most expensive film ever made given a budget of around US$300 million. It points out early reviews for the film have been positive, so there is potential for a substantial boost to earnings if the movie does become a box office success.

This implies some potential for upside to Macquarie’s valuation-based price target of $22.06, which compares to the targets of Deutsche Bank of $20.75 and GSJB Were at $20.30. Overall the FNarena database shows an average price target on the stock of $20.76. Following the upgrade by Deutsche Bank the database shows News is rated as Buy seven times, Hold once and Reduce once.

Shares in News Corporation today are higher and as at 10.40am the stock was up 42c or 2.5% at $17.32. This compares to a range over the past year of $8.93 to $17.37.

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