Will News Corp. Jettison its Newspapers When 81-Year-Old Rupert Murdoch Departs?

Is it time for News Corp. (NWSA) to get out of the newspaper business? Despite such venerable titles as the Wall Street Journal and the Telegraph, operating margins at News Corp’s publishing unit are substantially lower than its other, faster-growing segments, and publishing results are deteriorating.

What’s more, the unit accounts for most of the parent company’s headaches. The cell phone hacking debacle, which has dogged the company for years and forced it to shutter the 168 year-old News of the World tabloid in 2011, has cost it $380 million so far, and counting.

Overpaying for a trophy property didn’t help, either. In 2009, News Corp. was forced to write off nearly $3 billion on its $5.6 billion purchase of Dow Jones & Co. in 2007 when CEO and newspaper fan Rupert Murdoch, 81, paid nearly a 70% premium to get his hands on the Journal.

Compared to some other media stocks, such as Disney (DIS), Viacom (VIA.B) and Time Warner (TWX), News Corp. has disappointed in recent years.

NWS Chart

NWS data by YCharts

This underperformance, in part, is due to the weakening results and narrowing profit margin in publishing, muting the impact of News Corp’s better-performing units.

NWS Operating Margin TTM Chart

NWS Operating Margin TTM data by YCharts

In the fiscal second quarter, ended Dec. 31, publishing margins narrowed to 10%, compared to 16% a year earlier, as revenue slid 9% to $2.13 billion. Operating profit plunged 43% to $218 million.

News Corp.’s cable business, on the other hand, had margins of 41% in the second quarter, up from 37% a year earlier. Operating profit in the second quarter jumped 20% to $882 million on only a 9% rise in revenue to $2.16 billion. And cable doesn’t rub off on your hands.

Same sort of story with News Corp.’s other big unit, filmed entertainment: margins widened to 19% in the fiscal second quarter from 10% a year earlier, while operating income jumped 108%.

Overall, second-quarter revenue rose 2.4% to $8.98 billion, while net income jumped 66% to $1.13 billion, or 42 cents a share.

The cell phone scandal, which at its worst involved News of the World journalists hacking into the phone of a murdered school girl, has now followed News Corp. to the U.S. Lawyer Mark Lewis, who tangled with News Corp. in Britain, is here gathering evidence for three lawsuits he plans to file claiming the phones of his clients were hacked while they were in the U.S.

The passion for papers may end with Rupert Murdoch, and younger executives at this point may find newspapers revolting. A likely successor, now that Murdoch’s son James has been tarnished in the phone hacking scandal and has backed away from News Corp. unit British Sky Broadcasting Group, is Chase Carey, 57, News Corp.’s chief operating officer. Carey is a former CEO of DirecTV, not a newspaper guy.

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.



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