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News Corp Axes Tablet Newspaper, What Can Investors Do?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Aside from being the dominant tablet to use for online browsing (see “Apple Products Make Up the ‘Bulk’ of Mobile Traffic”) Apple's iPad currently has over 275,000 apps available in its App Store, ranging from business news to video games, but one of the most innovative was a publication introduced by News Corp (NASDAQ: NWS) in early 2011. Called "The Daily," (epic introductory video here) News Corp's tablet-only digital newspaper was centered on the idea that readers would be offered far lower prices than traditional publications charged due to the lack of print infrastructure, while enjoying a streamlined interface designed for touch-screen technology.

In a press release on its official website yesterday, though, News Corp is announcing that it "will cease standalone publication of The Daily iPad app on December 15, 2012," and that some pieces of its structure "will be folded into The [New York] Post." On the decision, CEO Rupert Murdoch had this to say:

"From its launch, The Daily was a bold experiment in digital publishing and an amazing vehicle for innovation. Unfortunately, our experience was that we could not find a large enough audience quickly enough to convince us the business model was sustainable in the long-term. Therefore we will take the very best of what we have learned at The Daily and apply it to all our properties. [...] I know The New York Post will continue to grow and become stronger on the web, on mobile, and not least, the paper itself."

While the publication was originally launched as a standalone app for Apple's iPad, versions for the iPhone, Google Android tablets, and the Amazon Kindle Fire had been added more recently, along with a pricing structure that was available on a weekly, monthly, or yearly basis. Regarding Apple's iPad, readers could subscribe for 99 cents a week or $39.99 a year, while iPhone and Kindle versions were offered at close to half this price.

While we don't have specific up-to-date user statistics from News Corp, a letter from the Editor in July disclosed that The Daily had "100,000 paying subs who are renewing their subscriptions at a 98% rate," which still implies that at a yearly operating cost of approximately $26 million, the publication was operating at a loss, no matter how innovative an experience it was. Using an average user rate of $39.99 a year, we can estimate that The Daily needed roughly 650,000 subscribers to break even.

Though it's certainly sad to see a publication close its doors -- especially with the quality that The Daily maintained -- it makes sense from a profitability standpoint to fold its best aspects into The New York Post, which has traditionally had a much larger readership.

So what does this mean for investors?

The move comes as part of a larger restructuring effort for News Corp, which will effectively split its TV and movie business into a new entity named Fox Group, while it holds on to the newspaper and publishing side of things. As can probably be expected, the market’s reaction to these events has been fairly positive; shares of News Corp are up over 2.5% over the past five days of trading activity.

Over the longer haul, though, there are obvious questions about News Corp shares post-split, when it no longer has the high-flying entertainment arm to drive growth. Last quarter, News Corp’s publishing division experienced a whopping 48% decline in YOY earnings, but aggregate EPS still beat the Street’s earnings estimates because of its cable TV networks in particular.

Now, it has been announced that existing NWSA shareholders will receive a piece of both parts of the spin-off, but no details have been released as of yet. In our opinion, it wouldn’t be a bad idea to consider getting into the stock now, which still trades at an attractive 12 times year-ahead earnings. Post-split, you’d get a bit of the high-growth Fox Group while hanging onto News Corp to see how profitable it’s publishing realm can be on its own.

In comparison to industry peers, NWSA is particularly cheap; its aforementioned forward P/E is below the likes of Time Warner (NYSE: TWX) at 12.9X, Time Warner Cable (NYSE: TWC) at 13.8X, New York Times (NYSE: NYT) at 15.9X, and CBS (NYSE: CBS) at 12.2X.

Even more importantly, though, sell-side analysts are expecting News Corp as a whole to generate EPS growth of 14.1% a year through 2017, which is lightyears ahead of its average (-15.3%) over the past half-decade. Accelerating growth is always a positive – especially when investors get the choice of owning Fox Group separately from News Corp next year – but it’s also important to note that this forecast is above all of its peers mentioned above. Time Warner (11.9%), Time Warner Cable (13.4%), New York Times (3.1%), and CBS (14.0%) are all predicted to experience lesser growth.

From a cash flow standpoint – News Corp is sitting on a pile over $6 billion high – the company is also cheap, trading at a lowly 4.8 times the cash on its books. This multiple is far below Time Warner (13.9X), Time Warner Cable (7.4X), and CBS (23.9X). Only the New York Times, trading at 1.9 times its cash hoard, is cheaper.

To recap: we like News Corp at the moment, as it is undervalued by using nearly every metric under the sun, not to mention a rather bullish EPS outlook going forward. Post-split, it’s highly likely that investors will retain a piece of both News Corp and Fox Group, with the latter providing an even better growth opportunity. For more news and information regarding this stock, check out its profile page on Insider Monkey

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in NYT. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Time Warner. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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