Foxtel Sale And DAZN Investment Will Expand Digital Footprint

Key Takeaways

• Sale of Foxtel is expected to strengthen balance sheet and improve profitability by reducing debt and repaying loans.
  
• Growth in digital and adjacent revenue streams, particularly digital real estate and Dow Jones, shows potential for revenue and earnings improvement.
  
• Regulatory uncertainty and currency fluctuations challenge revenue growth, while difficult market conditions impact digital real estate and media advertising performance.

Catalysts

A media and information services company, creates and distributes authoritative and engaging content, and other products and services for consumers and businesses worldwide.

• The sale of Foxtel is expected to significantly strengthen News Corp’s balance sheet by repaying outstanding shareholder loans and transferring debt, which should improve net margins and profitability.
  
• The acquisition of a 6% stake in DAZN provides potential value upside from DAZN’s growth, which could positively impact future earnings.
  
• The growth in digital and adjacent revenue streams, particularly in digital real estate and Dow Jones segments, signals potential for improved revenue and earnings as the company continues to expand its digital footprint.
  
• Dow Jones segment's focus on higher-margin B2B products, like Risk and Compliance and new offerings, is expected to drive margin expansion and improved profitability.
  
• Cost savings from the News Media segment transformations, such as transitions to streaming and commercial printing partnerships, are anticipated to enhance net margins.

News Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming News's revenue will decrease by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $699.7 million (and earnings per share of $1.2) by about March 2028, up from $428.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $831 million in earnings, and the most bearish expecting $503.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.4x on those 2028 earnings, down from 35.5x today. This future PE is greater than the current PE for the US Media industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

News Future Earnings Per Share Growth

Risks

• The sale of Foxtel, despite potentially strengthening the balance sheet, introduces uncertainty as the transition includes regulatory approvals and maintaining a minority stake in DAZN, which may impact future revenues if DAZN underperforms.
  
• The ongoing Factiva customer dispute has negatively impacted revenues and could continue to pose challenges for Dow Jones, affecting both revenue growth and margin expansion.
  
• Currency fluctuations present a headwind, particularly with the Australian dollar and pound sterling, which may adversely influence reported revenues and earnings in the second half of the fiscal year.
  
• The challenging conditions in the U.S. housing market, including high mortgage rates, may constrain revenue growth at realtor.com, impacting the digital real estate segment's overall financial performance.
  
• The News Media segment is facing difficult advertising conditions and forex headwinds, which are expected to make the second half of the fiscal year more challenging, potentially affecting overall net income and margins.

Valuation

• The analysts have a consensus price target of $35.627 for News based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $44.0, and the most bearish reporting a price target of just $26.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.2 billion, earnings will come to $699.7 million, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 6.7%.
• Given the current share price of $26.8, the analyst price target of $35.63 is 24.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.