Analyst Downgrades News Corp. Over Phone-Hacking Concerns

The rising cost of litgation, and vulnerability to rivals in wake of the distraction, prompted the downgrade

As the potential cost of phone-hacking-related litigation mounts for News Corp., Needham & Co., an equity analyst, downgraded the company's stock from "buy" to "hold" on Monday.

Laura Martin, a Needham analyst who covers News Corp., said that the rising cost of litgation, and vulnerability to rivals in wake of the distraction, prompted the downgrade. 

News Corp. faces an increasing number of lawsuits in England as the owner of the now-defunct News of the World, the British tabloid guilty of still undetermined counts of phone hacking. News Corp. closed the News of the World in July after the revelation that a private investigator on the newspaper's payroll had hacked the phone of Milly Dowler, a teenager girl who was abducted and later murdered.

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The company has already set aside millions of dollars in anticipation of a string of lawsuits, but Martin suggested the U.S. operation has not properly accounted for the full cost of the scandal.

Earlier this month News Corp. released a strong earnings report that bested analysts' predictions. However, it covered the period immediately leading up to the worsening of the scandal. 

No media company has fared well during the recent economic turmoil, but to many — including Chairman and CEO Rupert Murdoch himself — News Corp.'s stock remains undervalued.

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Other analysts have yet to follow Needham's lead. Rich Greenfield of BTIG declined to comment on that downgrade, referring to his company's most recent report on News Corp., issued Aug. 19. 

"News Corp. is an inexpensive stock, particularly when put in the context of its

double digit earnings growth," Greenfield and Brandon Ross wrote, adding that the question for them is what the increasingly mature company will do with its strong free cash flow and an underleveraged balance sheet.

Reports from other outlets have gotten a similar response from many of the analysts.

Still, this is the first such act by any analyst when it comes to News Corp., a media conglomerate that owns everything from the Fox movie studio to the Wall Street Journal.