Fox’s early life as a new company has been nothing short of disappointing.
Ouch. That’s the assessment of the reborn Fox Corporation from MoffettNathanson Senior Analyst Michael Nathanson, who laments that the company has been hurt by multiple headwinds. As such, it has been able “to prove the superiority of their strategy and assets.”
In a newly penned report from Nathanson, the analyst notes that Fox’s earnings estimates have been cut twice since mid-March, and that Fox’s Cable Networks revenue growth in the near term “has been way below our estimate.”
Even worse, the company’s acquisition of Credible Labs “has not been seen as … well, credible,” Nathanson says.
Then, there is the sharp and continued decline of cable TV subscribers.
“Over the past six months, just as Fox started out life as a pure-play bet on live sports and news, there has been a sharp acceleration in the industry-wide rate of cord-cutting thanks in part to troubles at DirecTV and [AT&T TV Now],” he says. “Up to this point, Fox has been hurt by those headwinds and has not been able to prove the superiority of their strategy and assets. However, we see major catalysts on the horizon that should improve the perception of the company and push the stock higher.”
Nathanson first points to Fox’s affiliate fee pricing power. He likes this thanks to the company’s strength in live sports and news, which he believes “should become obvious as they roll into calendar year 2020.”
Then, there’s the successful negotiation of new carriage agreements with DISH and Cox, and new affiliation deals with two of Fox’s largest affiliate groups: Nexstar Media Group and Gray Television.
“Over the next few months, we believe that Fox has deals coming due with Charter and
several of the largest virtual MVPDs,” Nathanson says.
Given the success of its other just-inked deals, a new Charter deal in important markets such as Los Angeles and New York could come without disruption.
Lastly, Nathanson is a fan of Fox’s programming strategy.
“Fox’s broadcast network, dedicated to live sports is showing signs that the strategy works,” he concludes. “NFL ratings have started off strong, WWE’s Smackdown debut was solid and the new fall line-up is performing better than peers. As such, we see upside in fiscal Q2 and fiscal Q3 ad forecasts at the [Fox] network.”
With that, MoffettNathanson maintains its “Buy” rating on Fox, “as we think the sell-off in the stock is overdone,” Nathanson says. “The current valuation does not properly reflect the upside from upcoming renewals and improving Television profitability driven by retrans and likely higher advertising from the company’s sports investments.”
But, MoffettNathanson is decreasing is target multiples to reflect the more challenging secular industry headwinds in Pay TV subscriber trends. “We now ascribe a 9x to Fox’s Cable Networks FY 2020E EBITDA (previously 10x) and an 8x multiple to the television
segment (previously 9x). Factoring in net debt and Fox’s other assets gives us an equity value of $39 per share (vs. $42 previously).”
The lowered target price still represents 28% upside to the current valuation, Nathanson concludes.
FOXA finished Tuesday’s trading down 55 cents to $30.06.
