News Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global diversified media and information services company, News Corporation’s revenue streams are diverse, ranging from digital real estate services, news publishing, subscription video services, and book publishing.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The key to sustainable value creation is a company’s capacity to generate high returns on invested capital for a long duration and this is what will ultimately determine a company’s moat.

Business Overview

News Corporation is a multifaceted global media and information services company. Here’s a breakdown of its operations:

  • Digital Real Estate Services: This segment houses News Corp’s digital real estate businesses, primarily in Australia and the US. These operations include platforms such as Realtor.com, Move, and REA Group. These platforms enable the discovery, sale, and lease of property.

Digital Real Estate revenues are growing, especially the Digital Real Estate Services division in Australia that is growing much faster than the US one.

  • Subscription Video Services: Through this segment, News Corp provides sports and entertainment content, mainly in Australia. The leading brands include Foxtel. Foxtel offers pay TV and streaming content.

There is an increasing shift towards streaming from Linear TV, and the company is investing heavily in streaming to take advantage of the trend.

  • News Media: The News Media segment comprises News Corp’s numerous news and information publications, predominantly in Australia and the UK. It includes such titles as The Wall Street Journal, The Times, and The Australian.

News media is a challenging business to be in with declining revenues because of the shift to digital. However, due to brand recognition and local nature of news, there is value to be found.

  • Book Publishing: HarperCollins, a global publishing company, sits in this segment. HarperCollins creates a wide spectrum of literary and nonfiction works.

Book Publishing is a very steady source of revenue and is resilient.

Moat Assessment

News Corporation’s moat, while present, is not particularly strong across its entire business. It is a 2/5 rating because of the following:

  • Intangible Assets: News Corp has a number of well-known brands and titles in its News Media and Book Publishing segments, such as The Wall Street Journal, The Times, and HarperCollins. These brands might offer pricing power or customer loyalty but they are still open to disruption.

The value of brands is that they give pricing power, but they are susceptible to changing preferences and thus cannot always be relied upon.

  • Switching Costs: Some of the company’s businesses, including Digital Real Estate Services and Subscription Video Services, do exhibit reasonable switching costs, but the competition in these sectors is increasing, potentially lowering those switching costs.

Switching costs are a powerful moat but aren’t very relevant in digital media businesses.

  • Network Effects: While there is a network effect within platforms such as Realtor.com and REA, the network effect isn’t very relevant in news or book publishing.
  • Cost Advantages: No significant cost advantages compared to its competitors.

Overall, while each segment may have some defensibility, they are all susceptible to technological innovation and competition. This makes its moat weak.

Risks to Moat and Business Resilience

  1. Technological Disruption: The media industry is always vulnerable to technological disruption. Shifts in consumer preferences (towards streaming), news consumption, and advertising methods pose a constant threat. News Corp’s legacy businesses (newspapers) face significant disruption.

The shift from traditional print to digital presents considerable risks. If News Corp is unable to innovate successfully in the digital space, it could face significant market share loss.

  1. Competition: There is strong competition within all the markets the company is operating in. Competing with the likes of Google in advertising and Netflix and Amazon in entertainment means the company faces a lot of competition.

Aggressive competition will require the company to spend more on marketing and research, lowering the profitability.

  1. Changing Consumer Preferences: Changing tastes of consumers is a significant risk factor. The company has to anticipate and evolve to consumer trends, for example, in the subscription video business, where there is a significant shift towards streaming, and away from linear TV.

The company must successfully predict and cater to changing consumer preferences, or else they can lose relevance in the market.

Financial Analysis

  • Revenue Distribution: The company’s revenues are split between Digital Real Estate Services, Subscription Video Services, News Media, and Book Publishing. The Digital Real Estate Services segment is by far the highest in terms of profitability, but News Media is highest in revenue.

News Media still provides the largest portion of revenue for News Corp, whereas Digital Real Estate Services contributes most towards profits.

  • Margins: The most profitable segment is Digital Real Estate Services, which has operating margins around 35%. The other segments have much lower margins, with News Media in particular lagging behind other segments.

Digital Real Estate Services has by far the highest profit margins and growth among all of News Corp’s segments.

  • Key Financials (Latest 10Q):
    • Revenue: Total revenue for the three months ended September 30, 2023 was $2.536 billion, 7.4% lower when compared to same period last year.

The lower revenues were impacted mostly by the negative foreign currency impact. * Net Income: The net income for the three months ended September 30, 2023 was $217 million compared to $109 million for the same period last year.

The increased net profit is mainly because of higher revenues in Digital Real Estate Services and higher other gains. * Debt: The company’s long term debt has reduced to $5.852 billion from 6.358 billion, which is good for the company. * Cash: The company has cash and marketable securities worth $1.417 billion on hand at the end of Q1 2024.

Overall, financials have been good in the latest quarters. There is a strong uptrend in profits and revenue. The company is aggressively expanding its digital segment and restructuring its traditional media segments for more profitability.

  • Financial Trends: Revenue growth is variable because of market conditions. Profits are increasing because of improving profitability and restructuring exercises. Debt is decreasing, giving them more maneuverability in tough times.

Overall, the company is taking steps to improve its profitability and revenues. It seems well on the road to improvement, but this could still take several quarters.

  • Recent Concerns: There is some amount of negativity in traditional media companies, especially newspapers, because of the shift towards digital. The company’s management is focused on making its digital businesses very profitable, and this seems to be paying off in the latest financial reports.

Understandability: 3 / 5

While the company’s business model is relatively straightforward, understanding each of the businesses they operate, and how they are interconnected makes it somewhat complicated. Specifically:

  • Multiple Segments: News Corp operates in various segments, each with its own dynamics and challenges. This can make understanding the overall business difficult to follow for the average investor.
  • Geographic Distribution: It is important to analyze their different segments in different geographical areas. The factors influencing their growth in Australia may be significantly different from those affecting the growth of their operations in the US or UK.

Balance Sheet Health: 4 / 5

News Corp’s balance sheet is in fairly good shape, with a few things to be mindful of:

  • Debt: Company has a debt of $5.85 billion. However, it is mostly long-term and they are actively deleveraging.
  • Cash: The company has about $1.4 billion of cash in hand, giving them more than enough liquidity for operations and investments.
  • Intangibles: The company has substantial goodwill and intangible assets because of prior acquisitions.

To Conclude, this is a media company that is currently transforming into a digital media company. This transition is showing some promise but it is not fully completed and has significant risks associated with it. The moat is only relatively narrow and faces disruption from the industry. The financials are pretty solid and seem to be improving.