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Rupert Murdoch's News Corp. has been the best performing media stock this year and analysts expect the Fox and MySpace owner to remain ahead of the pack.
By Paul R. La Monica, CNNMoney.com editor at large
April 2 2007: 1:09 PM EDT

NEW YORK (CNNMoney.com) -- Some TV critics are wondering if the continued success of Sanjaya Malakar, the woefully out of tune contestant on Fox's "American Idol," will be what finally causes ratings for the hit show to tank.

Yet, investors in Fox's parent company don't seem to be too worried that "Idol's" popularity has peaked. Shares of News Corp (Charts)., which owns the Fox television and movie studios and social networking site MySpace, are up about 10 percent this year.

By way of comparison, shares of rivals Walt Disney (Charts) and Viacom (Charts) are unchanged, CBS (Charts) is down about 2 percent and Time Warner's (Charts) stock has fallen 9 percent. (Time Warner is the parent company of CNNMoney.com)

Analysts say the ratings surge at Fox, which went from fourth place in the 18-49 year-old ratings race at the end of 2006 to leading in the advertiser-coveted demographic since "Idol" rejoined Fox's primetimes schedule in January, is a key reason behind the success in News Corp.'s stock.

News Corp. now appears poised to win the 18-49 ratings crown for the third straight season. And the company's network television unit accounts for about 20 percent of total revenue.

"As long as 'American Idol' stays strong, things will continue to work fine for News Corp.," said Alan Gould, an analyst with Natexis Bleichroeder.

But there's more to News Corp. than Fox, analysts say. Gould said that under chairman Rupert Murdoch, News Corp. has been perhaps the most successful of all the major media companies in terms of embracing digital media.

News Corp. bought MySpace parent company Intermix Media in 2005 for $580 million, a price that's now considered a steal.

"Strategically, Murdoch has been ahead of everybody. He's been looking at everything from a more global perspective than anyone else in the media business," Gould said.

David Joyce, an analyst with Miller Tabak & Co., said News Corp. should see a big boost in revenue and profits in its Fox Interactive Media unit, which includes MySpace, over the next few years, as an advertising revenue sharing agreement with search engine leader Google (Charts) kicks in.

Joyce added that he's not concerned that News Corp.'s recent decision to form an online video joint venture with GE-owned NBC Universal that will compete against Google's YouTube video sharing subsidiary will derail the partnership between MySpace and Google.

Analysts also said that News Corp.'s move to get out of the U.S. satellite television business was a wise one. News Corp. agreed late last year to swap its controlling interest in DirecTV (Charts) to Liberty Media, the conglomerate controlled by mogul John Malone, in exchange for Liberty's approximately 16 percent stake in News Corp.

News Corp. shareholders are set to vote on this transaction on April 3 and it is widely expected that they will approve the deal.

Joseph Bonner, an analyst with Argus Research, said getting rid of DirecTV accomplishes two things for News Corp. that shareholders should like. First, it allows News Corp. to exit the cutthroat U.S. satellite and cable TV market.

DirecTV has had difficulty competing with large cable companies like Comcast and Time Warner Cable, which are able to offer more services, such as Internet access and phone service, than the satellite TV providers.

News Corp. remains a big player in the global satellite TV market though, with a 39 percent stake in British Sky Broadcasting and full ownership of Sky Italia.

In addition, Bonner said Murdoch and other News Corp. executives no longer need to worry about meddling from Malone, who some feared would seek greater control over the company.

"The Liberty-DirecTV deal removes an ongoing issue about what was going to happen with News Corp. stock and control of the company. That cloud has lifted. News Corp. can move forward and not have more of management's time devoted to this," Bonner said.

Bonner added that News Corp. should also benefit from contract renegotiations with cable providers regarding its Fox News Channel. News Corp. was able to receive increased carriage fees from major cable companies due to the ratings success of Fox News Channel. Bonner said this should boost results in News Corp.'s cable programming unit, which accounts for 13 percent of overall sales and 26 percent of operating income.

Nonetheless, there are some concerns about News Corp. going forward. The company's movie business, which had a strong 2006 thanks to box office hits such as the "Borat" movie as well as sequels in the "X-Men" and "Ice Age" franchises, will face tougher comparisons this year.

This summer, News Corp. is releasing a "Fantastic Four" sequel, a fourth "Die Hard" film (and first since 1995) and the long-awaited movie based on Fox's long-running cartoon hit "The Simpsons." Gould said he's not sure if any of these films will be monster blockbusters.

News Corp. also faces a tough environment in some of its slower-growth "old media" businesses such as its newspaper and magazines divisions and HarperCollins book publishing unit.

Still, analysts said News Corp. should continue to outperform its media brethren. "They are the best of the media conglomerates," said Miller Tabak's Joyce.

Gould adds that even though the stock trades at a premium to its rivals on both a price-to-earnings and price to earnings before interest, taxes and depreciation and amortization (EBITDA) basis, the higher valuation is justified because of MySpace's growth potential.

To be sure, MySpace and other online assets are still a small part of News Corp. The company said in February when it reported fiscal second quarter results that Fox Interactive Media posted a slight loss in the quarter even though sales rose 70 percent from a year ago.

But News Corp. president and COO Peter Chernin vowed during the call that Fox Interactive Media would not only be profitable in 2008, but that operating margins should be about 20 percent.

"The key thing to watch will be the evolution of MySpace and Fox Interactive Media and how quickly those profits ramp up," Gould said.