Is It Really Wise to Buy News Corp Pre-Split?

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News Corp (NASDAQ: NWS) was one of the top ten service companies loved by hedge funds during the third quarter, with over sixty notable investors – 13F filers – having the stock in their portfolios. It's obvious that they are not invested in NWSA for the 0.7% dividend yield; in fact, the most compelling investment thesis is that News Corp will see solid appreciation once it's split into two publicly traded companies – one for publishing and one for media/broadcasting. The breakup should help both companies to achieve better focus on core operations while appealing to more investors.

The recent earnings announcement showed strong performance in News Corp’s television segment, with management reiterating support for the cable networks division. News Corp has made efforts to diversify its revenue streams, including adding affiliate fees and an online subscription model for news programming. The media company will also rely on international growth, with clients in the U.K., Europe, Asia, the U.S. and Latin America.

News Corp is up over 25% since the announcement of the planned spinoff, but we believe hedge funds see additional upside. Looking at a back of the envelope valuation, News Corp’s next year estimated EPS comes in at $1.99 per share. Assuming the publishing unit (25% of revenues) trades in line with publishers – an average of Gannett and New York Times is around 11x earnings – and the entertainment segment (75% of revenues) trades in line with Disney and Time Warner at 17x, its upside could be another 25% appreciation.

S&P also has a price target above News Corp’s current trading range. The rating agency's sum-of-the-parts price target is at $29 a share, compared to News Corp’s current trading price of $24.50. Ken Griffin, billionaire investor and founder of Citadel Investment Group, is a News Corp supporter (check out Ken Griffin’s newest picks).

Time Warner (NYSE: TWX) is the broadcasting arm of Time Warner, following the 2008 split of the media and cable giant. Time Warner has beaten EPS estimates in each of the last four quarters, and has managed to outpace the S&P 500 by 100% year to date. The stock now trades at the high end of the industry – 18x earnings – but fails to boast the growth rate to warrant such a premium valuation – an 11% five-year expected CAGR. Interestingly, Steve Cohen and SAC Capital boosted their stake in TWX by 250% last quarter (see Steven Cohen’s other top bets).

Viacom (NASDAQ: VIAB) provides content via television and film production. The media company pays one of the more solid dividends, with a 2% yield that represents a payout of only 24% of earnings. Viacom is also one of the best 'growth at a reasonable price' plays, with the cheapest P/E (12x) of its peers, and one of the cheapest P/CF ratios (11x). Viacom also has one of the most robust growth rates at a 14% expected five-year EPS CAGR. Mega-investor Warren Buffett is the top fund owner of Viacom (see Warren Buffett’s new picks here).

Comcast (NASDAQ: CMCSA), meanwhile, is one of the best value plays in the media industry. The stock's dividend yield is not very robust at 1.8%, but it is well covered by Comcast’s $10 billion in cash on hand, as annual dividend payments amount to only $1.7 billion. Of the five media stocks listed here, Comcast is one of the cheapest on a P/E (7x) basis, and the cheapest on P/CF (7x) basis. Couple this with its industry-leading 15% five-year expected EPS CAGR, and there's obvious value to be had here.

Disney (NYSE: DIS) has experienced steady appreciation this year, up 30% year to date, while raising its annual dividend by 25%. Disney has managed to meet or beat EPS estimates in each of the last four quarters. The media company’s dividend yield still remains below its major peers, but future growth could be robust with the recent acquisition of the Star Wars franchise. Disney was a huge increase for Ken Fisher – founder of Fisher Asset Management – last quarter.

To recap: we believe that News Corp is an interesting play given its upcoming spinoff. The transition should allow the media company to better focus on future growth segments. News Corp’s broadcasting side should not only see real growth but also multiples expansion as the company attracts more growth-oriented investors. The publishing segment, meanwhile, will be able to explore growth through acquisitions and entries into new markets, including education.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney. 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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