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Morningstar | Fox Reports Strong 2Q; Deal Closing With Disney Appears Imminent

Fox posted a strong fiscal 2019 second quarter as revenue was in line with the Street projection and EBITDA came above the consensus estimate. While the results were once again positive, this may the last quarter for the combined firm. The soon-to-be-spun-off New Fox Corp. represents a minority piece of this quarter’s revenue and earnings, but the revenue growth at the broadcast network and Fox News is a positive sign for the successor firm. We are maintaining our wide moat rating but are raising our fair value estimate to $51 per share to $46 as we have updated our model to forecast only the successor firm, which we now value at $13 using the current Fox share count. Our total fair value estimate is based on the Disney deal (at $38 per share) and the value of New Fox Corp.

Quarterly revenue was up 6% versus a year ago to $8.5 billion as growth in the cable and TV segments overcame the slight decline at the film studio. The cable segment was up 4%, driven by 8% domestic affiliate fee growth, as its core brands continue to increase fees and its newer channels expand their subscriber bases. Domestic advertising revenue improved 6% due to higher pricing at Fox News as the firm took advantage of the highly charged midterm elections and the ongoing battle over the border wall funding. International cable revenue fell 5% as the adverse effect of a strong dollar more than offset the continued growth in affiliate fees and ad revenue. EBITDA margin for the cable segment improved 90 basis points to 31.9% as revenue growth more than offset increased sports rights costs and currency effects on the international side.

The 19% year-over-year growth in broadcast television revenue was largely due to 21% growth in retransmission revenue and 15% increase in ad revenue, driven by the addition of Thursday Night NFL games and political spending. However, the segment posted an EBITDA loss as expenses grew 24% largely because of the rights costs for the additional NFL games.

Looking at the studio business, which will move over to Disney, revenue was down 4% due to lower syndication revenue from the TV side and a smaller theatrical slate. EBITDA margin for the studio segment increased 410 basis points to 8.9% as a result of lower marketing and fewer new series launches.