Current Price $19.25
Code NWS-A
Yield 0.6%
Market Capitalization $77289.0
TCI Price Target $0.00
Investment Sector Entertainment Diversified
Price/Earnings Ratio 28.9
Recommendation Avoid
INDUSTRY STATISTICS
Market Capitalization: 243B
Price / Earnings: 18.0
Price / Book: -36.2
Net Profit Margin 10.3%
Price To Free Cash Flow 121.5
Return on Equity: 9.0%
Total Debt / Equity: 0.4
Dividend Yield: 1.3%
The Industry is not for the faint of heart. Earnings and profitability are fleeting. The return on equity is low, and does not adequately compensate above the returns available on debt. The business is capital intensive, with low returns on capital and with very low profit margins.
If, the securities were cheap, on a bargain basis, then possibly a candidate may be located. Currently this is not the case with the average P/E ratio at 18.
CAPITALIZATION
Market Cap 60.72B
Enterprise Value 66.60B
Trailing P/E 28.90
Forward P/E 18.69
PEG Ratio (5 yr expected): 1.11
Price/Sales 2.45
Price/Book 2.13
Enterprise Value/Revenue 2.70
Enterprise Value/EBITDA 12.064
Capitalization structure is a very important component within the story of NWS-A & NWS.
The above figures representing Enterprise value are inaccurate. They are inaccurate for the reason that they do not take into account the “Off Balance Sheet” Operating Leases. These Operating Leases add some $5859.0 million to the effective debt. This is “potentially” a severe problem. The earnings are extremely volatile, and fluctuate wildly. Without a consistent margin above Interest on debt + Operating Leases, bankruptcy proceedings could be initiated by the “minority” bondholders.
How possible or likely is this?
It has happened once in the last five years, and been close on one other occasion.
Did the bondholders trigger bankruptcy? No, but they technically could have.
The second far more serious problem with the Capitalization resides within the Common stock itself.
There are two classes of Common stock; Class A and Class B.
Class A common stock represents the original common stock.
Class B common stock represents the converted Preferred Stock. This was converted on a 1 for 2 basis and was designed as a “Poison Pill” defense against NWS being acquired. Only Class B has voting rights, and thus control resides in one class of common stock that is held by Mr. Murdoch.
Therefore NWS is only going to be controlled by this one “unaccountable” owner. There will be no method by which the control of the company and its policies can be influenced by the other owners.
Holding NWS is therefore an examination of management and the strategies of management.
Have they been profitable and in the minority owners best interests?
INCOME STATEMENT
Profit Margin 8.84%
Operating Margin 15.59%
Return on Assets 5.25%
Return on Equity 9.65%
From the two margins we can ascertain that this business is just not that profitable. The Profit margin and Return on Equity are the two margins that flow to the Class-A common stock. They are poor. On aggregate the Profit Margin is 3.3%. This is not a profitable business.
Return on assets seemingly is high. This is very misleading.
The Return on Assets returns some $4.60 on investment. If we look at a different industry to get some perspective of what is possible, looking at OFIX the Return on Assets is $16.48. OFIX is also an “acquirer” of assets. The message being that you can buy high return assets that directly flow to the bottom line or you can buy low return assets. NWS tends to buy very low return assets.
The reason for such low profitability lies in the very high Costs associated with the business. Some 82% of gross revenues are consumed within the costs. Are there any discretionary cash-flows within the cost structure that are hidden, providing the margin of safety of redirecting them in time of need? Not at all, the Costs contain nothing that can be salvaged. This suggests poor negotiating on contracts with providers of content, be that the various sports bodies [NFL, NHL, etc]
The only discretionary cash-flows identified were found within Capital Expenditures. These amounted to $55.4 million or $0.01 per share.
BALANCE SHEET
Total Cash 5.32B
Total Cash Per Share 1.688
Total Debt 11.43B
Total Debt/Equity 0.401
Current Ratio 1.866
Book Value Per Share 9.021
Immediately there are problems that are highly visible that must call into question the advisability of NWS as an investment grade common stock.
The Current ratio falls below the minimum 2.0 required.
The debt is understated by the amount contracted to the Operating Leases.
The return on Retained Earnings has been 0.00%
This is unacceptable as an investment. It demonstrates unequivocally that the investment decisions under the incumbent management have destroyed shareholder value. The common stock is a pure speculation.
The Book Value resides in liquidation value only, and as such should be discounted by an appropriate rate as the demonstrated returns fall far below the purchase price paid. It is this either gross underperformance of purchased assets, or, poorly selected assets, combined with the poison pill defense that makes NWS such a dangerous investment.
SUMMARY
What do the Institutions think of NWS?
Well currently not that much.
Only some 10% of the float is owned by the Mutual Funds & Hedge Funds. This for such a large capitalization common stock is a very insignificant holding. I suspect the dual class of common stock is a negative in this age of owner activism. There is no way that value can be unlocked or increased without the management’s compliance.
The calculated Intrinsic Value = $0.00
Liquidation Value is the relevant valuation here, but has not been calculated.
The intricate capitalization structure designed to retain control of the business and thus the allocation of capital could be of benefit with the right management. With the incumbent management and demonstrated returns, it is an unmitigated disaster. I would advise looking elsewhere for an investment.