Media titan News Corp. (NASDAQ:NWSA) is coming under fire for allegedly hacking into a murdered school girl’s phone to retrieve voicemail messages. A private investigator for the company’s tabloid, News of the World, was accused Tuesday of retrieving voicemail messages and eventually deleting them, which complicated the police investigation.
This is not the first time News of the World has been caught hacking into phones, either — after a string of politicians, celebrities, and even members of the British royal family had their phones illegally hacked.
And the controversy is costing News of the World advertising revenue. For example, Ford (NYSE:F), Cooperative Group, Vauxhall, Lloyds Banking Group and Virgin Holidays have suspended advertising in the News Of The World over the phone-hacking claims, according to SkyNews.
While News Corp. shares are cheap, with a price-to-earnings-to-growth ratio of 0.88 (where 1.0 is considered fairly priced), here four more compelling reasons to stay away from it:
• It under-earns its capital cost. News Corp. still isn’t earning enough operating profit to offset its cost of capital. To decide this, let’s look at EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. The silver lining is that News Corp. is perhaps quickly getting less bad. In 2010, News Corp.’s EVA momentum was up 27%, based on 2009 revenue of $30.4 billion, and EVA that improved from negative $9.5 billion in 2009 to negative $1.1 billion in 2010, using a 9% weighted average cost of capital.
• Its most recent earnings report was disappointing. The past five quarters have been a mixed bag for News Corp’s earnings. Since March 2010, the company has beaten predictions in three quarters and missed the mark in two quarters including the most recent report. In its most recent quarter, News Corp.’s earnings of 26 cents a share were a penny below what analysts had predicted.
• Its financial condition is weak. News Corp.’s balance sheet is weaker than that of its weak peers. After all, it has a relatively high debt-to-equity ratio of 0.55 (compared to 0.45 for the industry) and holds a whopping $13.2 billion in long-term debt. And its return on equity over the last five years has been a weak 7.6% — that’s below the industry’s 7.9% and way below the S&P 500’s 19.6%.
• It’s run like a publicly traded family business. Underlying News Corp.’s bad press is a complicated corporate governance situation. Chairman and CEO Rupert Murdoch has a genius for getting people to talk about the stories he wants them to discuss. But he has also made plenty of mistakes that have caused the company to perform haphazardly. Moreover, it remains unclear whether his children – who appear poised to run the company after he leaves – will have the skills needed to improve on News Corp.’s financial performance.
The reasons to avoid this stock are compelling. And the only catalyst I could see for the stock would be a change at the top.
Peter Cohan has no financial interest in the securities mentioned.
