Morningstar | Fox Corp Represents Murdoch’s Bet on the Value of Sports and News; Launching Coverage with $42 FVE. See Updated Analyst Note from 20 Mar 2019
We are launching coverage of Fox Corp with a narrow moat rating, negative trend, and $42 fair value estimate. Our fair value estimate for Fox Corp implies a fiscal 2019 price/earnings ratio of 17 and an enterprise value of 9 times fiscal 2019 EBITDA.After completing the Disney transaction, the Murdoch clan now oversees a much smaller media firm, albeit one that still owns some major brands. Fox, the successor firm to Twenty First Century Fox, consists of the Fox network, 28 local TV stations, Fox News Group, and Fox Sports. The new firm represents a large bet on the viability of live sports and news, as we project that the cable networks, including Fox News and FS1, will generate the vast majority of operating income for Fox Corp. We believe these bets are well placed given our expectations for the evolution of the television industry, but Fox is now undiversified relative to other media firms.
Fox News has finished as the top cable news network for the last 17 years, which spans two Republican presidential administrations and eight years of Democratic control of the White House. Despite the loss of founding CEO and Svengali Roger Ailes and on-air talent such as Bill O’Reilly, the network finished as the number one ranked cable network in the P2+ demo (all age groups) for both primetime and all-day for the last three years. We expect the network to retain its spot at the top of the cable news pyramid, allowing New Fox to increase the affiliate fees while maintaining carriage at both traditional and OTT distributors.
Fox’s attempt to beat ESPN, FS1, has not yet reached and may never meet that lofty target, but the network has established itself as a competitor in the cable sports wars. FS1 owns the rights to several sports, including MLB, college sports, and soccer. While we expect Fox to continue investing in acquiring rights, we believe that the channel faces an uphill struggle against a much larger competitor in ESPN.
While the Fox broadcast network still owns major sports rights including the NFL, Fox is now the only one of the four major broadcasters without an affiliated studio. We believe Fox will be able to source new shows from other studios, including independents such as Warner Bros., Lionsgate, and MGM, but we are not as sure as management that Fox will be able to obtain ownership rights to every new show, given the high level of demand for new shows from traditional and new outlets.
Fox is a news, sports and entertainment company. The company has three segments: Cable Network Programming, which consists of the production and licensing of news and sports content distributed primarily through cable television systems, direct broadcast satellite operators and telecommunication companies and online multi-channel video programming distributors; Television, which consists of the acquisition, marketing and distribution of broadcast network programming nationally under the FOX brand and the operation of several broadcast television stations; and Other, Corporate and Eliminations, which consists of corporate overhead costs, intracompany eliminations and the FOX Studios lot.
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