3 Reasons to Avoid NWSA and 1 Stock to Buy Instead

Over the past six months, News Corp’s shares (currently trading at $26.50) have posted a disappointing 10.9% loss, well below the S&P 500’s 11.3% gain. This might have investors contemplating their next move.

Is there a buying opportunity in News Corp, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Do We Think News Corp Will Underperform?

Even though the stock has become cheaper, we're cautious about News Corp. Here are three reasons why NWSA doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, News Corp struggled to consistently increase demand as its $8.5 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

News Corp has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.1%, lousy for a consumer discretionary business.

3. New Investments Aren’t Moving the Needle

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, News Corp’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Final Judgment

We see the value of companies helping consumers, but in the case of News Corp, we’re out. After the recent drawdown, the stock trades at 25× forward P/E (or $26.50 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.

Stocks We Like More Than News Corp

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