Happy holidays and a healthy new year from all of us here at Condor Capital! In the From the Portfolio Manager section of this issue of Condor Monthly, we examine News Corporation (NWSA) in more depth and comment on their strategy and valuation. We have received a number of questions following the Medicare Part D article included in last month's newsletter, so in this month's Financial Planning Corner, we discuss the new program in more depth and try to clarify some confusing aspects.
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From the Portfolio Manager
News Corporation (NWS/A)
About News Corporation:
Despite the underperformance of media stocks over the past year and a half, News Corporation’s attractive mix of assets render the stock a standout in the sector. Overall, we believe the bearishness on this stock is overdone as we foresee continued double-digit earnings growth and maintain our position that the stock is considerably undervalued.
Solid strategy for growth
News Corporation’s assets can best be described as a mix of stable businesses with strong cash flow and several relatively new businesses with impressive growth potential. While fairly mature and representing only 17% of revenues, the company’s newspaper business throws off a ton of cash. This income is reinvested in fast-growing areas of the company that have the potential to generate high returns on invested capital. What makes this segment of News Corp.’s business so stable is the company’s dominant market share. The company is the leading newspaper publisher in Australia, with over 65% circulation share, and its U.K. papers account for approximately one-third of all national newspapers sold. Thanks to these market-leading positions, News Corp. can attract greater numbers of advertisers and invest more cost effectively in content creation than its peers.
While the company’s remaining businesses do not have the same dominant market share positions, they offer the potential for much greater growth. In particular, the company’s movie studio generates industry-leading margins and it owns the rights to an impressive film library. The firm can capitalize on this library as home-entertainment formats evolve, such as its release of the Star Wars Trilogy on DVD for the first time in the fall of 2004, or in conjunction with News Corp’s television division. The firm’s television segment has seen its market share among younger viewers strengthen in recent years thanks to hits such as American Idol and 24. As a result, its revenues have benefited from a more attractive advertising demographic. Additionally, News Corp.’s cable networks deliver solid results quarter after quarter. Strong subscriber growth rates, increased advertising income, and higher affiliate renewal rates have been the trend across most of the division’s cable networks. To note, this unit should see a considerable boost in revenues when Fox News begins its affiliate renewals in September 2006, as the channel’s strong ratings ensures it will receive much higher renewal rates going forward.
In addition to these areas of strength, one of the company’s most appealing aspects is its potential for growth overseas. Specifically, Sky Italia should drive earnings growth due to the unit’s recent swing to profitability and increasing scale. Elsewhere, Star TV should realize strong growth in Asia due to its Chinese and Indian operations.
Internet strategy is sound
While we understand the skepticism investors have displayed towards News Corporation’s recent Internet acquisitions, the company’s overall media strategy is gradually coming into focus. Instead of trying to build a traditional portal, News Corp. is focusing on social portals, where users will rely on relationships to find and share content. In addition, the acquisitions are meant to build on the company’s core strengths: sports, news, and entertainment; and focus on the firm’s core demographic, young adults. Finally, while the company has been criticized for being “late” to acquire Internet properties, it is interesting to note that the company was also late to both network and cable television and now finds itself amongst the largest companies in those areas.
Attractive valuation
The company’s current valuation appears to reflect an overly bearish outlook. On a P/E basis, News Corp is trading at a discount to both Viacom and Time Warner and in-line with Disney, although it is growing faster than all three. News Corp is also the least expensive of the traditional media companies on a free-cash-flow basis and should continue to see margin expansion over the coming years. As a result, we consider shares of News Corp among the most attractive in the media sector.
Financial Planning Corner
Medicare's New Prescription Drug Coverage Plan
An article on Medicare's New Prescription Drug Coverage Plan was contained in last month's Condor Monthly email, but this is such a big deal and we have gotten so many inquiries on the topic that we are covering it again. There was a great special report in the December 12, 2005 issue of the Wall Street Journal, titled "Demystifying Medicare Part D", written by Denise Mann Kleinman and sponsored by Pfizer. Much of the content below was taken from this article.
Although people over the age of 65 comprise only about 13% of the total population, they use about 30% of all prescription drugs, according to statistics from the New York City-based American Council on Science and Health, a nonprofit health advocacy group. In fact, two-thirds of adults over age 65 use one or more drugs each day, and one-fourth of the people in this age group take three or more drugs each day, the group states. The new Medicare Prescription Drug Coverage Plan, known as Medicare Part D, is the biggest addition to Medicare – the federal health-insurance program for people 65 years of age or older and certain younger people with disabilities – since it was founded in 1965. President Bush has hailed the plan as “the greatest advance in health care for seniors” in 40 years. However, Medicare Part D is confusing and a recent poll conducted by the Harvard School of Public Health and the Henry J. Kaiser Family Foundation indicated that 61% of eligible seniors did not understand the new benefit and only 20% said they plan to sign up. The information below should help to clear up some of the confusion.
Voluntary Enrollment
There are approximately 43 million people currently enrolled in Medicare and they are all eligible to enroll in Medicare Part D. However, the plan is voluntary so you do not have to enroll. The initial enrollment period began on November 15, 2005 and ends on May 15, 2006. If you don’t join a Medicare Part D plan by May 15, 2006, you will have to wait until November 15, 2006 to join. Plus, your premium cost will go up at least 1% per month for every month that you wait and you will have to pay this penalty as long as you have Medicare prescription drug coverage. An eligible senior who delays enrollment until September 15, 2006 will pay a monthly Part D premium that is 4% higher than those who opt-in on or before May 15, 2006. The next open enrollment period is November 15, 2006 to December 31, 2006. However, the coverage for people who enroll during this period will not take effect until January 1, 2007.
Who Administers the Plan
Medicare Part D is quite different from traditional Medicare health insurance in that Medicare does not actually administer the program. Medicare subsidizes the prescription benefits, but private insurance companies administer the program. Enrolling in Part D means that you must choose a prescription plan from a private insurance company. Medicare set guidelines for the coverage in these plans, but each plan may be a little different and most states will have more than 40 plans to sift through. Typically, plans that offer more coverage will have higher monthly premiums. In mid-October, the government sent out a “Medicare and You” handbook listing all plans offered in your state. If you have not received yours, call 1-800-MEDICARE (1-800-633-4227).
How to Pick a Plan
“When choosing whether or not to join a Medicare D-sponsored plan or which plan to join, the three main factors that should be weighed include cost, convenience and coverage of your current prescriptions,” advises Tom Beam, co-author of “Health and Long-Term Care Financing for Seniors” and professor of insurance at The American College, the nation’s leading non-profit educator of the insurance and financial industry. For the two-thirds of Medicare members who already have some form of private or public drug coverage, experts suggest comparing and contrasting your plan with the new plans being offered. If your employer, union or Medigap policy covers your prescription costs, you should do a careful comparison before you make decisions. Your provider will give you a detailed notice telling you whether your policy covers as much as – or more than – the Medicare drug plan.
Cost
Cost comprises a monthly premium, the plan’s yearly deductible, and co-payments per prescription. “The average premium will be about $35 per month, but they can vary widely,” explains Beam. “For anyone with a chronic health condition that is treatable by drugs, including the 62 million people with heart disease, enrollment is especially compelling because the premium is set to represent only 26% of the actual cost with the balance paid by the federal government.” There’s also a yearly deductible, which can be up to $250 in 2006. After you meet your plan’s deductible, Medicare’s basic Part D benefit pays 75% of the cost of your prescriptions – up to $2,250 per year. Benefits then stop until your costs reach $3,600, after which Medicare pays 95% of them. This gap is Part D’s “doughnut hole”. How these deductibles are incorporated into each private plan varies. For instance, some plans help you with generics and/or discounted pricing on certain drugs during the gap. People who join also must pay part of the cost of the prescription as well. Co-payments vary by plan. In some plans, you pay the same co-payment for any prescription while others have different “tiers” with different costs. Generic drugs are often cheaper than brand names. Also, in some plans your share of the cost can increase when your prescription drug costs reach a certain limit.
How much you want to spend on a plan depends largely on how much you spend on drugs now, explains Tod Cooperman, MD, president of MedicareDrugPlans.com, a new consumer website that provides information to help better evaluate Medicare Part D drug plans. “If you take no medication now, you won’t be able to save money; however, you can look at the plan as insurance,” he says. “The initial reaction for a lot of people who don’t use any drugs or only take a few drugs is not to bother with Medicare Part D, and that can be a mistake.” Cooperman suggests that it’s a better bet to find a plan with a low monthly premium even if you don’t expect to use the plan. “If you lock in coverage now, should your needs change in the future, you could then look for a more appropriate plan without penalty since you will have the ability to change plans at the end of every year.” If you currently take two to three drugs, some estimates suggest that you can find a plan that can save you 40% to 50% of your drug costs. “Look for a plan with no deductible and a moderate monthly premium as there are many out there. By joining, your total out-of-pocket expenses won’t go much above $3,600 even in the worst of situations,” explains Cooperman. People who take six or more drugs per day make ideal candidates for Medicare Part D plans because their expenses are likely to be high enough to benefit from the 95% catastrophic coverage that kicks in after the doughnut hole fills up and total expenses exceed $3,600. One way to determine how much a Medicare Part D plan will save you is to use a tool on the National Council on the Aging website called the “BenefitsCheckUpRx” service. Simply follow the prompts to input how much you currently spend on drugs. The calculator will quickly assess the savings that you can anticipate with Part D.
Coverage
While some people suggest getting the cheapest plan that you can, others suggest making sure the plan you choose covers the medications that you are taking now. One way to do this is to use a tool on the Medicare website called “formulary finder.” Again, follow the prompts to choose your state, type in the drugs that you currently take and the website will direct you to local plans that cover your medications. The good news is that most formularies cover a good proportion of the top 100 drugs prescribed. For instance, most popular drugs to lower cholesterol or blood pressure are covered. Medicare drug plans must provide at least two drugs in each treatment class, but plans can establish preferred drug lists. If any of your drugs are not covered, you should also talk to your doctor to see if you can switch to similar medication that is covered by the plan. Additionally, if your drug needs change in the future, you can always consider changing to a different Drug Plan.
Convenience
Don’t forget to consider how the plan affects your schedule and lifestyle. “Some plans only work via mail order or through a specific pharmacy, but you may prefer to fill your prescriptions at your neighborhood pharmacy,” Beam says. “The convenience of getting something filled is very important.” Along the same lines, make sure you can still get the drugs in the dosage and manner to which you are accustomed. “Make sure your drugs are covered and make sure your pharmacy is covered,” stresses Cooperman.
For more information:
Medicare
1-800-MEDICARE (1-800-633-4227)
The official U.S. government site for people with Medicare
http://www.medicare.gov
http://www.MedicareDrugPlans.com
Evaluates Medicare D plans, including customer ratings and feedback
State Insurance Counseling Program (SHIP)
http://www.shiptalk.org
1-800-677-1116
A national program that offers one-on-one counseling and assistance to people with Medicare and their families
Websites and Tools to Help You Make Your Decision
For a National Council on the Aging cost estimator that will help you calculate potential savings and choose a plan:
http://www.ncoa.org and follow the prompts for BenefitsCheckUpRx
To determine which local plans cover the drugs that you currently take:
http://plancompare.medicare.gov/formularyfinder
For a landscape of local plans, this tool lists all plans available in your area and includes information on cost, coverage and convenience:
http://www.medicare.gov/medicarereform/map.asp 
