News Corporation: Navigating The Publishing Industry’s Shift To Digital (NASDAQ:NWS)

News CorporationNASDAQ:NWSAThe ), a media company that operates in Australia, the UK and the US and owns well-known brands like The Wall Street Journal and Herald Sun, is diverse and has operations throughout all three countries. Rupert Murdoch (and his family trust) control it. 39.4% share of the voting interests. Since its inception as an Adelaide-based newspaper, NWSA has experienced a long history of success. It now controls two large media conglomerates worldwide. Through its 65% ownership in Fox Sports and Foxtel in Australia, the company is a prominent player in the pay-TV market. It also leads in Australia’s real estate listings space through 61% ownership in REA Group. NWSA is also the owner of HarperCollins, an American book publisher. Move has a substantial digital property advertising company in the US.

Q2 Earnings – Revenue down 7% despite Growth in Professional Information and Streaming Services, EBITDA Declines 30%

Quarterly revenue decreased by 7.7% to $2.52billion from the previous year. FX had a 6% effect on the revenue decline. For the quarter, total segment EBITDA fell 30% to $409million. At the Dow Jones segment, the professional information business saw a 45% increase in revenue due to the acquisition of OPIS and CMA and growth in its Risk & Compliance products. Subscription video services also experienced growth. Broadcast revenue declined slightly due to higher streaming revenues via Foxtel’s Kayo or BINGE. The News UK segment continued to grow due to strong digital advertising revenues at The Sun. This is a result of the company’s expansion into the U.S. with increased yield and good results. CoStar Group is currently in talks with the company about possible Move sales.

EBITDA fell by 7%, highlighting the company’s vulnerability to economic cycles. Unfavorable currency movements (17%), as well as other factors, such declining sentiment on Dow Jones and in tech and finance, rising interest rates in digital realty, softening consumer spend on books, and lower advertiser confidence on News Media caused the decline. This all happened after the COVID-19 Pandemic, which sparked an unprecedented 18% increase in EBITDA. This is due to the effect of inflation. The EBITDA margin at 16.2% was lower than that of 21.6% in the prior period.

Evolving Publishing Industry: The Challenges

The industry NWSA serves is in transition. Traditional print publishing models are being challenged by the proliferation of information and news outlets available in digital media. This has been made possible by technological advances and innovation in technology. As consumers move from printed to digital media, this presents NWSA with significant challenges. Advertisers follow suit. The NWSA, which has well-respected brands, robust editorial resources and a strong brand, is better than many of its peers in publishing to help them make this transition. NWSA has the least leverage of its peer organizations, making it financially sound and able to make the transition to digital.

The challenges faced by the publishing industry are not a problem for the NWSA. However, the pay-television operations of Fox Sports and Foxtel, which is owned by the NWSA, provide some protection. They also face increasing pressure from streaming services. The growth outlook for REA Group is strong, while Move, the digital property advertising company of NWSA, makes significant progress in America.

The Publishing Industry Shift: Navigating

Digital technology is transforming the publishing industry. It accounts for a large portion of NWSA core earnings. With more and more people turning to digital news sources and websites for information and news, traditional power in the publishing industry is being lost. As a result, both advertising revenue as well as print-based audience are declining. Many publishers have had to either reduce or close their print operations.

In response to falling revenue from subscriptions and print advertising, Gannett Co. (GCI), the largest newspaper publisher in America and Tribune Publishing Company (owners of the Chicago Tribune and New York Daily News), and The Tribune Publishing Company (owners of the Chicago Tribune) both cut their printing operations. Tribune Publishing has reduced print publication frequency and jobs and consolidated printing operations. In some cases, it even shut down printed editions in order to concentrate on digital content. Gannett reduced the frequency of print publications and consolidated printing operations, while investing in digital growth via acquisitions and partnerships.

The portfolio of NWSA includes strong assets such as Fox Sports and The Wall Street Journal, which are a foundational piece for the company. Also, NWSA is seeing promising results from its investments in the digital space of video on demand, in particular in Foxtel Now’s Kayo streaming service. It continues to generate significant free cash flow despite the difficulties faced by the legacy newspaper publishing industry, even though it is experiencing a decline in its profitability.

The NWSA has a low leverage ratio and strong cash flow, which allows it to weather any transition to digital publishing.

Dividend buybacks and share buybacks

The dividend rate has been unchanged at 20c per share since 2015 as NWSA used its cash to purchase new businesses. NWSA has announced in September 2021 a buyback of USD 1,000,000.

Valuation

As my fair price is $19 per share, I feel the shares are well priced. My revenue growth is expected to be 1%. The digital channel growth may partially offset the decline in print media. Moving forward, I expect a small compression of margins. These are my major assumptions.

The multiples for this stock are less than historical, with a $19 share price. This is due to the secular decline in printed media.

There is risk and uncertainty

Advertising and marketing industry depends on changing consumer sentiment and corporate confidence. The news media unit generates significant revenue through advertising, and this is a concern. Other revenue streams, like subscription video and property-sensitive online real estate, could be affected by the health crisis. The long-term challenge facing NWSA will be to retain its audience, as the sector shifts to online. It is crucial that the company’s cost structure be adjusted in order to compensate for the lower advertising revenues due to the digital marketplace.

Conclusion

The financial strength of NWSA includes a stable balance sheet, steady cash flow and a solid bank account. Its stability distinguishes it from the rest of the media sector and allows it to adjust to changing media environments. Its cash flow is aided by its portfolio of online real estate businesses that have been successful in Australia and the U.S.

Technology and innovations continue to pose major problems for the publishing sector. While the company has been working to change its business model, and make online content monetizable, external forces could still affect it. While NWSA is financially strong, it may be difficult to purchase assets to diversify earnings. The shares have a fair price and I recommend that you stay on the sidelines.