Analyst Downgrades News Corp. Stock, Citing Phone Hacking 'Witch Hunt,' 'Powerful Personal Enemies'

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Needham's Laura Martin also writes that “News Corp. is not a good place to hide during downward market cycles," while Miller Tabak's David Joyce calls the stock the "cheapest in our universe" and says it already prices in hacking-related concerns.

NEW YORK - Needham & Co. on Monday downgraded its rating on the stock of Rupert Murdoch's News Corp. from "buy" to "hold," citing legal costs related to the phone hacking scandal, a "witch hunt" by “powerful personal enemies” of the media mogul who can use it against him, as well as the stock's history of underperforming amid weaker stock markets.

"We expect litigation costs to be a meaningful cost center for News Corp. for the foreseeable future, and we think this expense is not adequately reflected in Wall Street models," analyst Laura Martin wrote in a report, estimating the additional legal costs at $100 million-$150 million for the fiscal year that runs through June 2012.

“Wall Street underestimates the resolve of powerful personal enemies of the Murdochs and political enemies of News Corp.’s conservative media outlets,” she also said. Speaking of a “witch hunt,” Martin added: "We expect the powerful enemies of conservative-leaning Fox News and Wall Street Journal to exhibit sharper elbows in an election year like 2012."

Even if accusations prove erroneous, "near term headline risk for News Corp. is acute," the analyst said.

The conglomerate is also traditionally not a good play amid weak stock markets, which have recently seen volatility amid continued concerns about the U.S. economy and debt issues around the world, according to the Needham report.

"Recent market volatility suggests that markets may trend downward over the next 12 months," Martin wrote. "Over the past 15 years, in 100 percent of instances, News Corp.’s share price underperformed downward corrections in the S&P 500, typically by 15 percent over 6-12 months."

The Needham analyst concluded: “News Corp. is not a good place to hide during downward market cycles.”

Overall, she said that "the risk of owning News Corp. is rising vis-a-vis its peers."

What could help the stock? Martin mentioned "a robust economy," an increase of its current stock buyback program from $5 billion to $12 billion and a sale of newspaper assets, which aren't popular on Wall Street.

Meanwhile, Miller Tabak analyst David Joyce took a different view of News Corp., which he rates a "buy" with a short-term price target of $17, on Monday.

He cited "good growth guidance" for the conglomerate's just-started new fiscal year and rejigged his financial estimates in some areas.

Reiterating his "buy," Joyce said the company's stock is the "cheapest in our universe" and added that "we believe the hacking-related fears are already built into the stock price."

News Corp. shares opened higher on Monday amid a broader market gain.


Twitter: @georgszalai