News Corp investors reading between headlines

Of all the details in Crikey's release of News Corp Australia's 2013 internal operating accounts recently, the revelation that the average salary at The Australian clocked in at $174,000 was the most juicy. Who knew climate denialists were so expensive?

Journos over at the still-profitable Melbourne Herald-Sun were presumably peeved that their colleagues on the loss making Oz aren't so keen on all that productivity stuff they urge on everyone else.

For shareholders in News Corp (ASX:NWS) this was a gloriously entertaining sideshow.

For a company with adjusted revenues of $US8.6 billion last year, $US6.3 billion of which comes from newspapers and information services, what happens at The Australian, The Courier Mail and Adelaide Advertiser barely matters.

According to the documents, in 2012-13 revenue from News Corp's Australian newspapers fell 14 per cent to $1.9 billion. Circulation revenue was down 5 per cent but the killer was advertising revenue, down 18 per cent. There isn't much evidence to suggest this trend has abated in the past year either, or that digital subscriptions will ever replicate this lost revenue.

At the recent meeting covering the 2014 result, chief executive Robert Thompson claimed newspapers were 'seriously undervalued as a platform by advertisers', which seems like a back-handed way of saying your clients are a teeny bit stupid.

Don't think so Robert.

With a circulation of 2.4 million, including 900,000 digital subscribers, The Wall Street Journal has a good future ahead of it, as does the 2-million selling UK Sun.

Many, if not most, of News Corp's Australian papers do not.

Readers that have grown up with The Australian may become wistful at the thought of its passing but if many of News Corp's Australian newspapers aren't already in run off mode, they should be.

With ad revenue plummeting and online subscription growth disappointing, the company is approaching the point when its Australian newspaper operations become submerged in a sea of red ink.

The investment opportunity is in the fact that this is already priced in to the company's stock.

The danger is that management fails to act before losing a truckload of money.

The big questions therefore are as follows: Will News Corp eventually exit its local newspaper operations and if so, when?

How much will it lose on the way through? And what will happen to the $US3.1 billion on the balance sheet?

We already know the answer to the last one – shareholders can whistle Dixie.

At the full-year results presentation chief financial officer Bedi Singh was asked twice whether the $US3.1 billion would reach shareholders through a buyback or dividend.

Err, no.

In true Murdoch fashion, reinvestments in existing businesses and acquisitions are more likely.

The question over the future of local newspaper operations is less clear-cut. The final call won't be with local staff desperately talking up their own book, but Murdoch himself, who at the time of the demerger owned 14 per cent of the business and controlled almost 40 per cent of the votes.

His closure of The News of the World in the face of the phone hacking scandal, and the slashing of one-in-eight positions at the newspaper business in 2013, shows his wily ruthlessness.

As for his track record, for every MySpace there is an REA.

The market is betting that Murdoch and his team, emotionally attached to newspapers, will be unable to let go without first blowing up a few billion.

There's no doubt Murdoch loves newspapers but he loves building a bigger business more, and with that comes more influence.

The Australian need not be the only vehicle through which the company exerts power, as Fox News in the US proves.

What is being overlooked, much as it was at the time of the phone hacking scandal, are the great businesses in the News Corp stable that offset the dross.

In the recent result Foxtel, half owned by News Corp, grew its subscriber base by 6 per cent, book publishing performed spectacularly, driven by a 35 per cent increase in e-book revenues, and REA Group grew net profit by 37 per cent.

Since Intelligent Investor Share Advisor recommended News Corp at the height of the hacking scandal in 2011 the share price has more than doubled.

This may not be as clear-cut an opportunity due to the niggling worries over management, but there's enough to warrant a closer look.

News Corp has an enterprise value of $US7 billion, almost half of which is accounted for by the stake in REA.

The company's book publishing division is worth $1.5 billion and we'd estimate Fox Sports and Foxtel are worth at least $4 billion.

Even without ascribing a value to digital education business Amplify, these assets easily support the current share price.

If management can bring itself to dump the Australian newspaper operations – Clive, forget the dinosaurs, here's your chance to own another Titanic! - before the losses get too large, the current price could look very attractive.

Note: Our model Growth Portfolio holds shares in News Corp.