News Corp currently trades at $26.72 per share and has shown little upside over the past six months, posting a middling return of 0.9%. The stock also fell short of the S&P 500’s 7.7% gain during that period.
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Why Do We Think News Corp Will Underperform?
We’re cautious about News Corp. Here are three reasons you should be careful with NWSA, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, News Corp struggled to consistently increase demand as its $8.8 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
News Corp has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 7.1%, below what we’d expect for a consumer discretionary business.
3. New Investments Aren’t Moving the Needle
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, News Corp’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of News Corp, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 22.1× forward P/E (or $26.72 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
Stocks We Like More Than News Corp
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