With literally one of the greatest brands in show business, Twenty-First Century Fox Inc (Nasdaq: FOX, FOXA) is morphing away from its Hollywood roots, as the film giant is selling most of its film-based entertainment assets to Walt Disney Co. ( DIS) in a $52.4 billion deal.
Founded in 1915, Twenty-First Century Fox has its roots in the movie business (it renamed itself from Twentieth Century Fox at the turn of the century), but now is looking to focus on broadcast, sports and news, including its flagship Fox News Network.
With the Disney deal in play, company co-chairmen Rupert and Lachlan Murdoch are looking to rebrand as a new Fox, with the company shedding its historic film studio, where epics like the Star Wars franchise, “Cleopatra” and “The Sound of Music” were produced.
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Can a newly revamped Fox compete in a cable television industry where consumers are leaving in droves, and grow as a company with a media platform of news, sports and broadcast programming? For now, the reviews are positive, but over the long haul, critics may decide that Fox is in the wrong business at the wrong time.
Fox stock at a glance. Despite cable industry woes overall, Fox stock topped $37 per share, with a consensus one-year target price of $45 per share.
The stock is up 5.1 percent on a year-to-date basis (versus 0.6 percent for the Standard & Poor’s 500 index), and is up 22 percent over the past year, with entertainment industry analysts generally upbeat about Twenty-First Century Fox stock for the short term (B. Riley FBR, for example, recently upgraded Fox to “buy” from “neutral.”)
The company’s revenue picture looks generally solid, with second-quarter profits skyrocketing to $1.83 billion, or 99 cents a share, from $856 million, or 46 cents a share, one year ago. Twenty-First Century Fox was another big beneficiary of the recently enacted tax reform bill, booking $1.34 billion in profits. Overall revenue climbed to $8.04 billion, from $7.68 billion, over the same period.
Fueling revenue growth was both Fox News and Fox’s FSI sports network, driving quarterly financial growth with a 12 percent upward spike from U.S. affiliate fee revenue.
Revenue from Fox’s broadcast division was down for the quarter, with advertising revenue growing softer due to a post-election lull in activity and lower ratings from major TV sports broadcasts, notably the National Football League and major league baseball’s World Series.
Pros of buying Fox stock. Fox shares have gained more than 8 percent since its early February quarterly earnings release. Investors locked on to Fox’s adjusted earnings from continuing operations, which clocked in 42 cents for the quarter, beating general consensus estimates 36 cents.
While largely not going all in on Fox stock, money managers are holding steady, and the stock is faring well against other entertainment industry stocks — especially its new partner, Disney.
“Among firms in the media sub-sector, Walt Disney is the most underweight stock among active U.S. large-cap equity strategies, with an average differential of -0.26 percent against the benchmark,” says Mark Scott, an investment specialist at eVestment, which tracks stock market movements on a granular basis. “Twenty-First Century Fox was held at equal weight, however.”
A big financial advantage for Fox is that the company is now leaner after the Disney deal. For the time being, Fox doesn’t have to focus additional time, effort or money on competing with giants in the scripted entertainment business, or compete with Netflix ( NFLX) and other streaming media giants.
“That could possibly result in a stronger focus on its core competencies, which has been the news division,” says Dan Green, director of the master of entertainment industry management program at Carnegie Mellon University. “Holding on to Fox News Channel and its sister, Fox Business Channel, keeps lots of eyes on the part of the business people are increasingly interested in, which is the news.”
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Though the election of President Donald Trump may have divided much of the country, it’s been good for the cable news business and specifically for Fox News Channel, which continues to draw terrific ratings, Green says. “Fox also holds on to the sports networks — something Disney probably wouldn’t want anyway due to its concerns with profitability at ESPN.”
Cons of buying Fox stock. Investment industry observers who track the entertainment sector are more bullish for the short term, and less so for the long haul.
“The entertainment industry is going through an unprecedented change right now,” says David Levenhagen, assistant equity portfolio manager at USAA. “The historical revenue models for both content providers and distributors are being challenged by digital platforms that provide a better customer experience to the viewer and more valuable user data to the advertisers.”
There is “significant uncertainty” about what the industry revenue picture will look like even one year down the road, and especially five years down the road, Levenhagen says. “That’s the primary reason we have had a hard time finding media stocks to recommend in this environment,” he says. “Many companies have decided scale is the best way to survive and have turned to merger and acquisitions to get bigger. We choose to invest in companies that already have a nice collection of assets that would attract eyeballs/buyers regardless of how the content is distributed.”
Consequently, it was surprising when the company announced it would be selling a majority of its assets to Disney. “If a media magnate like Rupert Murdoch and his sons believe this is the time to be selling assets, what signal does that send to lowly media stock investors like us?” Levenhagen says.
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The bottom line. Fox’s place in the media world is now unknown.
“Fox has chosen to participate in the currently most attractive areas of the traditional content business, but those are some of the areas most susceptible to disruption by the new distribution models, and now they will be competing with much less scale,” Levenhagen says. “Their challenge going forward will be to build, buy or partner with a direct-to-consumer platform that will allow them to monetize the content they have/create in the best way possible.”
“The biggest risk to investors is that Rupert & Co. are smarter than everyone else and they have already monetized the majority of their assets at the best possible price.”
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Pros and Cons to Investing in Twenty-First Century Fox (FOXA) Stock originally appeared on usnews.com
