Analyst Upgrades News Corp. Stock to 'Buy' Citing Likely Company Split

Rupert Murdoch - The Times CEO Summit - 1 - P - 2011
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Needham's Laura Martin also argues that earnings estimates for Rupert Murdoch's conglomerate are currently too low.

Needham & Co. analyst Laura Martin on Wednesday upgraded her stock rating on Rupert Murdoch's News Corp. from "hold" to "buy" in part due to an expected split of the conglomerate into an entertainment-centric and a publishing business.

"Fiscal year 2013-2017 earnings estimates are too low," she said in a report, in which she mentioned a $27 target price.

And she predicted that the company is likely to continue to clean up its balance sheet. "At approximately 20 percent of total asset value, News Corp. is one of the last entertainment conglomerates that still has meaningful nonconsolidated asset value," she said. "[President and COO] Chase Carey has stated a strategy to either own or sell the nonconsolidated assets. Over the past nine months, News Corp. has bought or sold six of its nonconsolidated line items."

As for the split, which News Corp.'s board is expected to approve Wednesday and announce Thursday, Martin estimated that this would create "approximately $5 per share of value" for investors.

Martin also addressed the question of whether News Corp. would face less litigation risk at its entertainment company.  "Although the company will not say a split limits litigation risk, we believe if the company were split into two corporate entities, it would be harder for any litigation settlement to come out of the entertainment assets, including the crown jewels Fox News and Fox broadcast network and stations," she said. "We also believe that any future costs of legal investigations would accrue to the print entity, freeing up the entertainment entity to grow earnings unhindered by these expenses."

All this "lowers uncertainty for investors in the entertainment entity and therefore allows the share price to migrate upward," she concluded.


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