James Carlisle

While the digital side of the media conglomerate is powering ahead, the print business is a big drag on profits

The story of News Corp in recent years has been a struggle to evolve from old media to new – from print to digital. Most obviously, that’s been seen in the online property classifieds business REA Group, where News holds a 62% stake. When we first upgraded News in 2013, that stake had a market value of $2.5 billion – about a quarter of News’s then market capitalisation of $10 billon. Now it’s worth $9.3 billon – around $16 per News Corp share, or 80% of the company’s $11.5 billion market cap.

The evolution has also been seen in books, where the higher margins from digital books has helped increase the EBITDA margin (earnings before interest, tax, depreciation and amortisation) from 10.4% in 2013 to 12.8%, thereby converting 3% annual revenue growth into a 6% annual EBITDA growth.

The shift to digital has been just as pronounced in what the company used to call its News and Information Services (NIS) division, but which this year has been split into Dow Jones and News Media, housing the company’s oldest, “printiest” media titles like The Australian and The Courier Mail in Australia, The Times and The Sun in the UK and the New York Post in the US.

Dow Jones, by contrast, comprises a string of assets better suited to the digital age, including The Wall Street Journal, Barron’s, MarketWatch and the eponymous Dow Jones professional information businesses.

News Media managed a dismal $US53 million ($74 million) in EBITDA in 2020, on revenue of $US2.8 billion, for a tenuous margin of less than 2%. These assets have some purpose in their promotion of News’s other businesses, but we’d tentatively ascribe them a value of zero and say no more about them.

It is Dow Jones making the lion’s share of profits in the old NIS division, which is the reason for splitting it out. Dow Jones has successfully embraced the digital world where News Media has largely failed.

The utility of these businesses makes their value clear and people are happy to pay. News has been steadily increasing the price of a digital subscription to The Wall Street Journal and it is now twice the price of The New York Times. The market appears to be expanding, with the average age of a WSJ subscriber falling from 56 in 2016 to 49 in 2020.

The value offered is clearer still at the Dow Jones risk and compliance business, which provides data and services to help customers stay compliant with the complex rules and regulations around money laundering, corruption, sanctions and trade regulation.

This business has increased revenue from about $US60 million in 2016 to almost $US160 million in 2020, 95% of which is from long-term contracts. With increasing regulation around the world, there’s no obvious reason why this rate of growth shouldn’t continue.

The weakness has been advertising, where a small increase in digital advertising revenues hasn’t offset a larger fall in print advertising. Overall advertising

Dow Jones has embraced the digital world where News Media has largely failed

revenues have fallen by 6% a year over the past couple of years, to $US359 million.

This has been more than offset by subscription revenue, however, which has risen by 6% a year to reach $US1.2 billion, driven by digital-only subscriptions, which have grown by 53% since 2018. Digital revenue first overtook print in 2016 and now contributes twothirds of the total.

In total, Dow Jones revenue has risen by 6% over the past couple of years, while expenses have risen 4% a year, so that the EBITDA margin has expanded from 13% to 15% and EBITDA has risen 22%.

The business now has 3.8 million subscribers in total, but management sees plenty of room for further growth, with a target pool of 12 million within the US, which it believes are “likely or very likely” to subscribe. There’s an even bigger opportunity outside the US, which currently contributes only 10% of subscribers.

The most obvious comparison to Dow Jones is The New York Times Company, which is listed on the New York Stock Exchange with an enterprise value of $US6.3 billion – a somewhat baffling 26 times its 2019 EBITDA of $US240 million.

Excluding the Dow Jones professional information businesses, both the NYT and Dow Jones have revenues that are split about 50/50 between print and digital – but, including the professional information businesses (arguably the best of the lot), Dow Jones’s print share falls to a third. Against that, the NYT is growing subscriptions more quickly and probably has more unused pricing power. Analysts are expecting its EBITDA to double by 2024, which is comfortably more than we’d expect for Dow Jones.

Overall, we’d struggle to justify an EBITDA multiple for Dow Jones of more than 12, which would give it a value of around $US3 billion. Still, that’s double the value we put on the entire News and Information Services division a couple of years ago, and translates to about $4 billion, or about $7 a share. It could be worth more than this, but we’re unwilling to push the boat out given the limited disclosures.

We’ll stick with our valuation of Move, the US real estate classifieds business, of about $US1.4 billion, or about $3 per News Corp share. Putting it all together we arrive at a value of just over $30 a share for the attractive businesses within News. From that, we need to deduct $5 a share for corporate costs (which came to about $US1.9 billion in 2020).

We’ll also make the convenient but not unreasonable assumption that News Media and Foxtel are worth nothing, which leaves a few remaining items, including net cash and investments and some pension obligations, which net off at around $3 a share.

That gets us to a value of about $29 per News Corp share on a reasonably conservative basis, although it takes for granted the current market valuation of REA Group. With the latter’s share price of about $115 sitting near the middle of our hold range, we’re happy to do that, although it creates a big swing factor.

Applying a conglomerate discount (accounting for complexity and potential tax charges should the thing ever be broken up) and “leaving something for the next man”, that $29 value explains our $25 sell price.

We’d now need a much bigger discount to persuade us to buy News. If you want exposure to REA Group then, in the absence of a very cheap price for News, we’d recommend buying it directly (although we note that it is currently well above our $90 buy price). For existing holders, though, there’s enough value to continue to hold.

James Carlisle is a senior analyst at Intelligent Investor..