There's gold in News Corp stock

(breakingviews.com) -- Rupert Murdoch commands fear and grudging respect from the subjects covered by the media baron's newspapers, television stations and cable channels around the globe. Yet investors treat his News Corporation with something closer to disdain.

To wit: A back-of-the-envelope calculation shows the collection of assets that Murdoch has cobbled together from the handful of antipodean newspapers he inherited from his father is worth at least $12 a share. That's nearly 50% more than Friday's price for News Corp "A" shares of $8 and change.

While conglomerates often trade at discounts to their component parts, a gap of this size is notable, even though it has narrowed in the recent market rally. At one point the stock traded at just half of the potential sum of its parts.

Despite the continuing discount, however, buying News Corp (NWS, Fortune 500) shares today isn't quite like purchasing dollar bills on the cheap. When Warren Buffett and other value investors buy companies trading way below their net worth, they expect management to work like mad to close the gap, often by selling pieces off.

To the contrary, the 78-year old proprietor of News Corp seems determined to maintain his sprawling media empire. For evidence, look no further than the $5 billion purchase of Dow Jones a little over a year ago, a deal done despite the concerns of senior managers like departing chief operating officer Peter Chernin about raising News Corp's exposure to the troubled newspaper and financial industries.

But if Murdoch were to change his mind - or be persuaded to do so - there could be gold to be mined for investors buying News Corp shares.

Here's how the numbers stack up. News Corp's cable channels will generate $1.6 billion of earnings before interest and tax this year, Credit Suisse estimates. On a multiple of ten times, these earnings would be worth $16 billion.

20th Century Fox, the film studio that has brought movies like "The Sound of Music," "Star Wars" and "Alvin and the Chipmunks" to life, should make about $800 million of operating cash flow. On a multiple of around eight times, somewhat low to reflect the bumpiness of the movie business, the studio would be worth some $6.4 billion.

Then there are Fox TV stations in the United States, Italian broadcaster SKY Italia, the Star TV channels throughout Asia, and stakes in British Sky Broadcasting Group and German pay-TV company Premiere. Sanford Bernstein, the Wall Street research firm, reckons these holdings, along with some other odds and ends, are worth around $13 billion.

But wait, there's more. News Corp's Internet properties, including social networking giant MySpace, if put on revenue multiples similar to Facebook's own internal valuations, add up to another $1 billion, perhaps more depending on who's paying.

And then there are all those cretaceous print media operations, like the HarperCollins book imprint and newspapers like the regional tabloid New York Post and the globally influential Wall Street Journal and Times of London.

These businesses, plus a magazine and insert advertising division, should produce operating profit this year of just over $800 million, according to Credit Suisse's forecasts. Put those earnings on a conservative multiple of, say, five times and that adds another $4 billion of value to the pot.

Add all of these pieces up and News Corp's assets are theoretically worth at least $40 billion. Slice out the company's net debt, some minority interests and today's value of corporate expenses of about $250 million a year, and the whole shebang should be worth about $30 billion, or at least $12 a share.

The trouble is, with Murdoch very much in charge, the premium looks likely to remain theoretical. He doesn't just occupy the corner office. His super-voting "B" shares give him control over the company. So for investors, the remaining upside from closing the gap might only come if the boss's advancing age changed his outlook - or led the News Corp board to appoint a successor less attached to some of the company's assets.

[Disclaimer: News Corp became a minority investor in breakingviews.com following its acquisition of Dow Jones.]