News Corp. builds on MySpace success

By Robert Walberg

It turns out MySpace was a bargain after all.

Since Rupert Murdoch's News Corp. (NWS, news, msgs) "overpaid" for the social-networking Web site back in July 2005, the media company's stock has soared 41%. MySpace helped power the company's latest, better-than-expected earnings report; now look for the stock to continue its upward momentum.

News Corp. wasted little time monetizing the explosive success of MySpace, which it bought for $580 million. Not only did it roll out the site in other countries -- with Canada and Mexico slated to launch this quarter and China on deck -- it also struck a lucrative partnership with Google (GOOG, news, msgs) and is seeking to do something similar with eBay (EBAY, news, msgs). News Corp.'s rapidly growing online division, led by MySpace, is poised to beat the company's revenue target of $500 million during the 12 months through June and will be profitable in fiscal year 2008, management said during a conference call to discuss earnings.

• Video: Does MySpace need more government scrutiny?

Good news on TV, cable and film

While MySpace's sensational growth grabs much of the financial media's attention, it isn't the only reason to be excited about News Corp.'s stock. Earnings from continuing operations rose to 26 cents per share on revenue of $7.84 billion (both up 18% from a year ago), beating the consensus estimates of 25 cents and $7.37 billion.

The company saw solid revenue growth in all of its divisions and, after a shaky start, is expecting its Fox TV network to win the ratings battle for the key 18-to-49-year-old demographic in 2007, marking the third consecutive year on top. Fox’s ratings are largely driven by the success of blockbuster shows like "American Idol," "24," "Prison Break" and "House."

Revenue from cable networks, which include FX, Fox News Channel and Fox Sports, jumped nearly 14%. But the icing on the cake came from the company’s film division. That unit posted stronger-than-expected growth due to the popularity of films such as "Borat," "The Devil Wears Prada," "Ice Age 2: The Meltdown" and "X-Men: The Last Stand."

Not all the news was good, however, as the company continues to struggle with its concept for MyNetworkTV, which replaced the UPN network on Fox stations. Yet that's a minor dark patch in an otherwise rosy picture for the company.

Financial muscle

With the recent sale of its stake in DirectTV, the company has the financial muscle to help maintain its recent growth. Look for a more aggressive stock buyback plan and additional acquisitions. It may consider making a strong run at Tribune (TRB, news, msgs), which has assets that could help it over the long term -- assuming that it isn't dragged into a costly bidding war. Murdoch is first and foremost a newspaper man, and under his leadership it wouldn't take long to turn around the fortunes of the Tribune properties.

At 23 times forward earnings, News Corp. isn’t what you would call cheap. By comparison, Walt Disney (DIS, news, msgs) trades at only about 20 times estimated earnings. However, given the exciting growth potential of its Internet properties and the steady double-digit growth in its more traditional media units, it has plenty of upside left.

Barring any negative shocks, look for the stock to make a run at its all-time high of $33.50 over the next 12 to 18 months. Such a move would represent an additional gain of 37%. I want the owner of MySpace to be in my portfolio. With today's close, I'll add the stock to my Street Patrol tracking portfolio in MSN Money's Expert Picks section.

At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article.