News Corp’s Much-Anticipated Move into Streaming Media is Right Around the Corner
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rupert Murdoch, the founder and CEO of News Corp (NASDAQ: NWS), has a vast range of upcoming issues surrounding his company. At 81 years old, most Americans are ready to throw in the towel and move to the beach, but Mr. Murdoch has bigger plans that he’d like to accomplish before retiring.
In our opinion, it is clear that the first point on Murdoch’s agenda is to place a greater focus on 21st century media technologies, most notably in the realm of streaming movie services. As more consumers shift away from DVDs and turn their attention to streaming platforms like Netflix (NFLX) (see why billionaire Julian Robertson and Tiger Cubs bet on Netflix), Hulu, and UltraViolet, it’s extremely important that the company continues to expand its own footprint in this arena.
UltraViolet is an online collection of movies and TV shows that lets users stream their content through multiple devices. UltraViolet’s partnership with Wal-Mart (NYSE: WMT) has recently opened up another service to the website’s members. Customers can build their media libraries on UltraViolet by either purchasing movies online, or by taking their discs to a Wal-Mart store, where they can access standard-definition or high-definition versions of their favorite content. Wal-Mart executive John Aden believes that the program “allows customers to reconnect with the movies they already own on a variety of new devices, while preserving the investments they’ve already made in disc purchases.”
While companies such as Time Warner (NYSE: TWX), Paramount, and Sony (NYSE: SNE) currently utilize the UltraViolet digital locker system, News Corp will begin to stream films through the platform beginning on September 18th, albeit at a slower pace than its competitors. This month’s stroll into streaming content is News Corp’s second attempt at breaking into the business. Last year, the company offered films that had been theatrically released for two months, though each piece of content cost nearly $30 a piece. Customers didn’t line up to the pay the large premium for these movies, and the program did not work as planned.
This time around, News Corp has taken a different approach, as it plans to sell its movies via UltraViolet at around $15, a discount from competitors’ prices that are in the $20 range. This streaming service will allow movie watchers to purchase hot titles, such as Prometheus, about three weeks before the movie is available on DVD.
While it remains to be seen just how this move into streaming media will affect News Corp’s stock price, it should be mentioned that the company currently trades at a PEG ratio of 0.87; typically any figure below 1.0 signals undervaluation. More importantly, though, this ratio indicates that News Corp’s earnings growth is cheaper than primary competitor Time Warner (1.17).
Additionally, News Corp also sports a Forward Price-to-Earnings ratio (12.0X) that is below both the industry average (19.8X) and Time Warner (12.6X). With earnings expected to expand by 15.9% a year over the next half-decade – an estimate that outpaces both Time Warner and Sony – there appears to be a bit of a value-play here. Now, News Corp has also grown its operating (68.6%) free (148.5%) cash flows post-recession, but it still trades at a Price-to-Cash Flow ratio (5.9X) that is below the industry average (12.0X) and Time Warner (16.5X).
Interestingly, News Corp is becoming increasingly popular among hedge funds. In this year’s first quarter, 25 hedge funds held shares of News Corp, good for a collective holding value of $640.5 million. By the second quarter, a whopping 40 hedge funds initiated new positions in the company; its total interest is in excess of $2.5 billion. The Children’s Investment Fund and Beach Point Capital Management are the largest News Corp bulls, as each hold more than 40% of their portfolios in the company. Additionally, prominent managers like David Einhorn and Ken Griffin also are long News Corp.
To recap: We believe that News Corp’s partnership with UltraViolet has solidified the company’s push into streaming movie services, a move that will help it make the much-anticipated jump to the 21st century media arena. Due to its discounted pricing model and pre-DVD release schedule, all signs are pointing in the right direction for Rupert Murdoch and Co. Moreover, valuation indicators signal that there is some value to be had at the stock’s current price levels. As mentioned above, hedge funds seem to agree quite emphatically.
This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.