News Corporation shares traded down 4.6% on Monday in response to a downgrade from Bernstein Research analyst Michael Nathanson. Nathanson lowered his rating from outperform to market perform, cut his price target from $24 to $21, and lowered his earnings estimate by 7% for FY08 and 4% for FY09. Prior to this downgrade, Nathanson shared my view that NWS shares were substantially undervalued due to the company having the highest operating income growth in big cap media and the best potential to beat earnings estimates in 2008 and 2009.
NWS shares have been under pressure recently due to the fact that Fox Interactive Media, composed mostly of MySpace, is going to miss its FY08 revenue target by up to 10%. NWS shares suffered another setback last Friday when General Electric indicated that NBC Universal was under plan due to weakness in local TV advertising. GE also said that after holding up well in January and February, national ad trends weakened a bit (from very good levels) in March. Further comments that online advertising was feeling economic pressure only added to worries about MySpace.
This downgrade hits me hard because it is well reasoned….

….Between MySpace and traditional media advertising exposure, NWS suddenly is facing the possibility of decelerating operating income growth and negative EPS surprises. And the fact that the shares are cheap at under 15 times calendar 2008 EPS is not a panacea because as I pointed out last week, traditional media drives NWS earnings but MySpace drives the multiple. Both had been tailwinds. It is possible that both are turning into headwinds.