Although the S&P 500 is down 2.1% over the past six months, News Corp’s stock price has fallen further to $24.91, losing shareholders 7.8% of their capital. This might have investors contemplating their next move.
Is now the time to buy News Corp, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think News Corp Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why NWSA doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, News Corp struggled to consistently increase demand as its $8.62 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.
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 7.3%, below what we’d expect for a consumer discretionary business.
3. New Investments Aren’t Moving the Needle
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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 see the value of companies helping consumers, but in the case of News Corp, we’re out. Following the recent decline, the stock trades at 20.4× forward P/E (or $24.91 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.
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