News Corporation Posts 22% Decline in Q4 Revenue as COVID-19 Pandemic Hits Business; Target Price $10

News Corporation, a diversified international media and entertainment company, reported that its revenue slumped 22% in the June quarter as COVID-19-related business closures led to an advertisement sales collapse at its newspapers and websites, sending its shares down about 4% in after-hours trading on Thursday.

America’s largest newspaper by total circulation said its revenues dipped 22% to $1.92 billion in the fiscal fourth quarter ended June 30, down from $2.47 billion a year earlier, primarily driven by the negative impacts related to COVID-19 and the sale of News America Marketing.

News Corporation reported a net loss of $401 million, which includes non-cash impairment charges of $292 million and higher restructuring costs due to COVID-19, worse than a loss of $42 million a year ago.

“We have largely maintained our earnings forecasts which incorporate some benefits of management’s cost-cutting initiatives. Despite this, we do not see a return to pre-COVID-19 earnings level until fiscal 2022,” said Brian Han, senior equity analyst at Morningstar.

“With minimal changes to our forecasts, we retain our USD13.40 per share fair value estimate for News, or AUD 18.60. at the current exchange rate. Shares in the no-moat-rated group have staged a strong recovery from the recent COVID-19-induced lows and are now trading in line with our intrinsic assessment,” Han added.

In the quarter, Dow Jones achieved record average subscriptions of 3.8 million to its consumer products, led by 28% growth in digital-only subscriptions, including 23% growth in digital-only subscriptions at The Wall Street Journal.

“We recommend investors hold REA direct, but owning News Corporation is another way to gain exposure, the 61% stake has CMV of $6.8bn or $11.50 per NWSA share,” said Andrew McLeod, equity analyst at Morgan Stanley.

News Corporation’s shares closed 1.65% higher at $13.51 on Thursday but dipped about 4% in after-hours trading.

Executive comment

“The creation of the Dow Jones segment allows us to make a direct comparison with the New York Times,” Chief Executive Robert Thomson said on a post-earnings call, Reuters reported.

“In what has been a difficult year for many media companies, Dow Jones reported a 13% increase in Segment EBITDA, based on the strength of its Professional Information Business, digital growth and the pre-eminence of The Wall Street Journal. One result of our candid approach on costs was that, despite the COVID-19 impact, our cash position strengthened to $1.5 billion from $1.3 billion as of December 31st. We also saw increased profitability at Foxtel and our campaign to reset sports rights prices was successful.”

News Corporation stock forecast

Morgan Stanley target price is $10 with a high of $20 under a bull scenario and $5 under the worst-case scenario. News had its price target hoisted by research analysts at Loop Capital to $18 from $16. The brokerage presently has a “buy” rating on the stock.

We think it is good to hold for now as 100-day Moving Average and 100-200-day MACD Oscillator signal a mild selling opportunity.

On the other hand, three analysts forecast the average price in 12 months at $14.00 with a high forecast of $18.00 and a low forecast of $10.00. The average price target represents a 3.63% increase from the last price of $13.51. From those three, two analysts rated ‘Buy’, one analyst rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Analyst comment

“We are fundamentally bearish on the outlook for News Corporation shares. We are bullish on NWSA’s 61%-owned Australian digital media company REA Group (OW), but we recommend investors own REA direct rather than via the conglomerate structure of NWSA. Historically, direct ownership has provided superior returns … and we expect that to continue to be the case,” Morgan Stanley’s McLeod added.

“Outside of the REA investment, we think earnings risks across the rest of the NWSA asset portfolio skew more to the downside for print assets and payTV business Foxtel/FoxSports. If it were to occur, a full break-up of the company could have the potential to close the discount at which the shares have historically traded to intrinsic value.”

Upside and Downside risks

1) Sale of large loss-making or declining print assets at a premium 2) Growth of OTT services more than offsets loss of cable/satellite subs at Foxtel. 3) Break-up or re-structure of the company. 4) REA makes gains ahead of expectations, Morgan Stanley highlighted as upside risks to News Corporation.

1) Accelerated decline in print ads brings downgrades and larger cash redundancy/restructuring costs. 2) A loss of positive earnings momentum at REA. 3) Worse-than-expected Foxtel earnings were major downside risks.