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Despite Some ‘Toxic' Assets, Analyst Likes News Corp.

The mushrooming scandal surrounding News Corp. has pushed down its stock price, making many of its assets appear more attractive, according to one new analyst report.

Michael Nathanson of Nomura Securities notes that while Rupert Murdoch had long accumulated “unwanted” assets, his company is now getting rid of things, from MySpace to News of the World.

In his report, Nathanson proposes separating the company in to three parts he calls Good NWS, Bad NWS and Toxic NWS.

Good NWS would include the cable networks, television and Sky Italia businesses. He estimates those alone would be valued at $14.54 per share.

Toxic NWS would include all of the newspaper assets. In addition to the scandal-plagued British papers, that would include newspaper operations in Australia and the U.S., plus remaining assets of Dow Jones. While some of these assets could be sold, Nathanson says that under News Corp. ownership, they now have little value.

Bad NWS includes other assets investors are concerned about including Filmed Entertainment, magazines and book publishing. With Good NWS worth $14.54 and Toxic NWS worth nothing, Bad NWS is being valued at just $1.10 a share, very cheap considering its income and cash flow.

“The risk/reward remains overwhelmingly positive,” he says.

Back in the real world, Nathanson is lowering his estimate of News Corp.’s fourth-quarter earnings by a penny to 31cents a share, because of slightly worse movie results.

But for 2012, he’s raising his estimates for operating income growth to 14.9% and increasing his forecast for earnings per share. His target price for News Corp. stock is $20, down from $21. The stock finished at $16.09 on Friday

Of course News Corp. presents some significant risks. First is that the cash that was supposed to pay for the withdrawn bid for British Sky Broadcasting will be used for a “value-destructive” acquisition (like MySpace, Dow Jones or Shine Media).

There will also be more bad headlines and legal and regulatory headaches for the company. Investigating itself will be expensive for News Corp. But Nathanson says there is limited risk to lawsuits in the U.S. or, barring new revelations, regulatory activity that will have a material impact on the company.