News Corp. Is Rich With Cash and Trades at a Bargain Price

Could News Corp.’s financial position make it attractive to a potential investor?

Jul 2, 2014 at 3:24PM

News Corp. (NASDAQ:NWS) (NASDAQ:NWSA) split from Twenty-First Century Fox in 2013 and left all the debt with the latter, giving the "old media" company financial stability and the opportunity to compete in the changing media landscape. As a result, News Corp. carries no long-term debt on its balance sheet, has a cash hoard of over $3 billion, and is extremely liquid.

Although the company's revenue and earnings are naturally declining as advertising dollars turn more to digital media, it is not in a death spiral by any means and still maintains a slew of well-recognized brands. Moreover, News Corp. generates a lot of cash from its operations even in the face of declining revenue and earnings.

No debt and flush with cash
Compared to its competitors Pearson (NYSE:PSO) and Thomson Reuters (NYSE:TRI), News Corp. maintains an envious financial position, as outlined in the following table.

 

Current Ratio

Quick Ratio

D/E

FCF positive?

News Corp.

2.15

1.88

0

Yes

Pearson

1.36

0.84

0.39

Yes

Thomson Reuters

0.78

0.59

0.47

Yes

Data Source: Morningstar

Many companies would love to be as liquid as News Corp. Its current and quick ratios of 2.15 and 1.88, respectively, display how flush with cash and liquid assets the company currently is. Having a current ratio above one is well-advised, while having a quick ratio above one exhibits strong liquidity and flexibility -- News Corp. certainly fits that billing. Pearson's current ratio is solid at 1.36, but both Pearson and Thomson Reuters deviate from News Corp. considering their respective quick ratios.

News Corp. also shines due to its lack of long-term debt, leading to its debt-to-equity ratio of zero. Both Pearson and Thomson Reuters carry debt, however, and do not have as much flexibility as News Corp. on a liquidity or capitalization basis. In Pearson's and Thomson's favor, however, the companies are free cash flow positive in the last three years, just like News Corp.

If you can't beat 'em, buy 'em
News Corp.'s extreme liquidity and zero debt could actually make it attractive to Pearson or Thomson Reuters as an acquisition. Pearson or Thomson could eliminate a competitor, while also adding a company with strong cash flow, no debt, and above average liquidity. Even by employing debt in a buyout, they could possibly improve their own financial conditions with the purchase of News Corp.

Adding to the likelihood and attractiveness of an acquisition, News Corp. trades at low valuations. Astonishingly, News Corp.'s P/B ratio is currently less than one at 0.8, so an investor could pick up the company for less than it is worth on an accounting basis; any earnings the company generated would be a plus. Moreover, News Corp.'s P/B value is a significant discount to its industry's average and to the S&P 500's, which are 1.9 and 2.6 respectively. Furthermore, News Corp. trades at a significant discount to its industry and to the S&P 500 on a sales basis. Its P/S multiple is 1.2, while the industry's is 2.6 and the S&P 500's is 1.7.

News Corp. could also prove attractive to a company with an affinity for old media such as Berkshire Hathaway. Berkshire has recently purchased newspapers throughout the country, and News Corp. still holds some newspaper assets in addition to The Wall Street Journal and Dow Jones.

Foolish takeaway
It is as if News Corp. was intentionally structured after its split from 21st Century Fox to be an attractive acquisition target. Regardless, the company is in a position to not only be acquired but also prosper on its own. It will be hard, however, for potential suitors to ignore a company with such strong financials and a multitude of recognized brands and assets. I believe the future is bright for News Corp. going forward as its valuation makes it attractive to investors and its financial position gives it the flexibility to take on the changing media landscape.

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Andrew Sebastian has the following options: long January 2015 $18 calls on News Corporation. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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