News Corp stock should rise as fears ebb: investors

The News Corporation building in New York July 13, 2011.

NEW YORK (Reuters) - Fear the dark arts of British tabloid journalism might crop up in the United States is likely to keep News Corp's stock under wraps for awhile, but the company's intrinsic value suggests shares should trade higher.

News Corp's stock rose 3.8 percent to close at $15.93 on Wednesday after Rupert Murdoch withdrew his bid for British broadcaster BSkyB amid growing opposition to the deal.

News Corp will generate about $7 billion in operating cash flow in 2012 and its market cap is about $42 billion, indicating a multiple of about 6, said Gautam Dhingra, chief executive and portfolio manager at High Pointe Capital Management LLC in Chicago.

But News Corp should have a multiple of 8 and a market cap of $56 billion, which equates to about $21 per share, he said.

"Based solely on the numbers, it doesn't make sense," Dhingra said. "Even assuming the side affects, it just doesn't compute that the stock price is down as much as it is."

Allegations of widespread criminality at the News of the World newspaper sparked a public furor last week, causing News Corp's stock to plunge 15 percent before Wednesday's rebound.

New revelations about phone hacking at the Sunday tabloid were behind the sell-off, as investors feared the scandal would spread to other News Corp assets. The 168-year-old newspaper was shuttered on Sunday after advertisers pulled their ads.

"To the extent these scandals stay limited to the British tabloids you can imagine that that is not a serious enough issue to warrant a decline in the stock price," Dhingra said.

The stock's steep plunge can be attributed to fear that unsavory British reporting practices could wash ashore in the United States.

"The only way to explain it is if people assign some probability, however small, that the scandal would go beyond News of the World and that it could extend to the most important asset, which is the Fox news channel," he added.

If the scandal has receded from U.S. headlines within a month then, "the fundamentals take over and the fundamentals dictate the stock is worth more than $20," Dhingra said.

StarMine, a Thomson Reuters investment research firm, puts an intrinsic value of $22.16 a share on News Corp, on the assumption it will post a cumulative annual growth rate of 9 percent on its earnings over the next decade.

NOT A BP OIL SPILL OR TEPCO NUCLEAR EVENT

Long-term investors have mostly shrugged off the hacking scandal and scuttled BSkyB deal because little damage has been inflicted on the revenue stream at News Corp, unlike the BP oil spill or tsunami-inflicted disaster at the Fukushima nuclear energy plant owned by Tokyo Electric Power Co Inc.

"We don't have a lot of concern around the long-term materiality of this," said one hedge fund manager, who spoke on condition of anonymity. "In this incidence, I don't think you have a financial nuclear bomb here."

The liability from the oil spill and nuclear disaster are potentially life-changing events for BP and Tepco, the manager said.

"Tepco probably won't exist as a company. The liability just dwarfs the equity," the manager said.

Scandals that involve employees who are not part of senior management rarely impact a company's share price for an extended time. Even employees who engage in illegal or immoral conduct almost never cause a long-term effect, said another investor, who spoke on the condition of anonymity.

The exception is when one or more employees can directly impact a company's balance sheet, such as traders Nick Leeson and Jerome Kerviel. Their unauthorized trading caused the collapse of Barings Bank in 1995 and a 4.9 billion euro loss at Societe Generale in 2008.

"Unless the rogues can lever against the balance sheet, malfeasance among lower downs is an annoying line item on the income statement that comes and goes and doesn't much impact long-term valuations," the investor added.

(Editing by Andre Grenon)