While most analysts have been focusing on the revenues and profits from News Corp.’s TV operations, one says Wall Street is underestimating the risk the company is exposed to because of the phone-hacking scandal at its British newspaper business.
“We are downgrading News Corp. to Hold (from Buy) and suspending our target price based on NWSA’s rising risk profile,” said Laura Martin, managing director at Needham & Co., in a research note Monday. “Weakening markets, new government investigations, growing litigation expenses, and a witch hunt for the Murdoch’s add risk to owning NWSA.”
Martin notes that there have been 35 lawsuits filed against News Corp. in the U.K., plus a U.S. class-action suit against the company, CEO Rupert Murdoch and his son James. The FBI and the Justice Department have investigations underway as well. “We expect litigation costs to be a meaningful cost center for NWSA for the foreseeable future and we think this expense is not adequately reflected in Wall Street models,” she says.
On top of that, Martin says that Wall Street underestimates the resolve of “powerful personal enemies” of the Murdochs and political enemies of News Corp.’s conservative media outlets. “We expect the powerful enemies of conservative-leaning Fox News and WSJ to exhibit sharper elbows in an election year like 2012,” she writes. “Near term headline risk for NWSA is acute, even if accusations prove erroneous after elections are over.”
Martin also notes that News Corp. has typically underperformed in the market when stocks move downward.
The bottom line: “The risk of owning NWSA is rising vis-à-vis its peers,” Martin says. Even if News Corp. has done nothing wrong the costs of investigations and litigation will be high, and the company will be under assault from political enemies. “We prefer CBS and Viacom to NWSA because they share the risk of market weakness, but don’t share other NWSA-specific risks.”