Fox Corp.: An Undervalued Company With Consistent Strong Performance

Summary

In today's dynamic media landscape, Fox Corporation (NASDAQ:FOXA) stands out as a company with a track record of consistent growth and resilience. Over the past five years, FOXA has demonstrated robust revenue growth and maintained strong net margins, underscoring its financial stability. Looking forward, there are promising indications of continued growth, driven by strategic initiatives such as digital expansion and content leadership. Additionally, FOXA's current valuation suggests it may be undervalued compared to its peers, with the potential for its multiples to expand, potentially benefiting the stock price. On the back of this, I recommend a buy rating for FOXA stock.

Financials

Over the past five years, FOXA has shown steady revenue growth. In 2023, it reported a growth rate of 7%, aligning with its five-year average. This rate has been consistently achieved over the last five years. Regarding net margins, FOXA has also displayed consistency and resilience, with the latest reported margin standing at 8%, in line with its five-year median of ~9%. Overall, FOXA has exhibited consistent and resilient financial performance with no indications of declining or worsening trends.

Valuation

Based on my assessment of the business, I forecast steady 7% revenue growth for FOXA in FY23 and FY24, with the company sustaining its margin. This projection stems from its robust historical performance in both revenue and net margins, reinforced by the recent quarterly result showcasing resilient growth across all reported segments. The outlook is further bolstered by FOXA's ongoing digital expansion, as seen through Tubi's growth momentum. Moreover, its content leadership via FOXA News Media offers a reliable revenue stream. Lastly, FOXA's market leadership, evidenced by leading in both price and volume, provides a strong competitive advantage, enabling them to preserve their moat.

As of now, FOXA's forward P/E stands at 9.3x, which is below its peer, Paramount Global (PARA), with a P/E of 12.19. In terms of margins, FOXA outperforms with an EBITDA margin of 21.5% compared to PARA’s 10.3% and a net margin of 12.5% versus PARA’s 3.7%. Consequently, I anticipate FOXA’s P/E will expand towards PARA’s multiple. Currently, FOXA is trading at a 34% discount. Utilizing a present forward P/E of 12x, my target price for FOXA is $35. Given its financial strength, consistency, strong competitive advantage, market leadership, and proactive digital expansion effort, I recommend a buy rating for FOXA.

Comments

FOXA reported strong fourth-quarter results, with revenues of $3.03 billion, net income of $369 million, and adjusted EBITDA of $735 million. The financial performance of FOXA is underscored by a 7% growth in total company revenue for fiscal 2023, significantly driven by a 12% rise in advertising revenues and a notable 17% increase in the television segment. Additionally, the adjusted EPS of 88 cents for the fourth quarter not only surpassed the Zacks Consensus Estimate by 23.94% but also marked an 18.9% increase year over year, indicating a strong trajectory of profitability.

On the strategic front, FOXA's digital expansion is illustrated through the growth momentum at Tubi, which saw a revenue increase of 47% in the fourth quarter due to enhanced engagement and stable pricing. Content leadership is another forte of FOXA, with FOXA News Media continuing to dominate in ratings and engagement and the entertainment segment notching multiple wins, showcasing a strong content portfolio. Furthermore, leveraging live sports events like the Women's World Cup and the upcoming UEFA European Soccer Championship as platforms for advertising revenues highlights a promising strategy for sustained growth.

Fox earnings call: ‘FOX News debuted its tweaked prime time lineup last month. We are pleased with the initial results and are confident that our deep bench of talent will continue to set the standard for all news services as we move towards the 2024 presidential election. This past year, FOX News' leadership position was never at risk. We sustained double-digit advantages in total viewership of our nearest competitors for the entire fiscal year even during the period where our prime time lineup was in transition. In fact, since its mid-July debut FOX News' new prime time lineup is up over 35% in total viewers and up over 40% in the 25 to 54 demographics versus the June schedule.’

With Tubi's revenue seeing an impressive growth of 47% and Total Viewer Time [TVT] increasing by 65%, these metrics clearly indicate an accelerating growth for Tubi compared to the previous quarter, during which it posted a 31% increase in revenue and a 38% growth in TVT.

One notable observation is that TVT is growing at a faster rate than revenue. This suggests that there's untapped advertising space within Tubi. This observation is promising because it indicates potential for additional revenue growth. As advertisers tap into this expanding audience, I anticipate an increase in Tubi's revenue. This, in turn, strengthen the growth assumption I've applied to FOXA.

Given FOXA's continued success with Tubi, I anticipate that the management will boost their investment in Tubi, aiming to further enhance FOXA's revenue growth in the coming periods. As a result, considering Tubi's current strength momentum and anticipated management support, I project Tubi to be a contributor to FOXA's revenue in FY 2024 and FY 2025, extending its recent strong financial performance forward, further supporting my assumption.

Fox earnings call: ‘With Tubi's revenue and engagement accelerating in fiscal '23, we are looking to further strengthen Tubi's position in fiscal '24. To that end, we are very excited to welcome Anjali Sud, as the new CEO of Tubi and look forward to seeing Tubi flourish further under her leadership.’

‘We expect to continue to invest in our growth initiatives. Here Tubi will be the focus of investment spend with the collective portfolio expected to deliver EBITDA in line or better than fiscal 2023’.

In terms of market positioning, FOXA demonstrated upfront market leadership by leading in both price and volume across live sports and news offerings in the recent upfront market. This strong market positioning is bolstered by a focused strategy that effectively differentiates FOXA in the market, establishing a competitive advantage. Moreover, the completion of approximately one-third of distribution renewals in fiscal 2023, which primarily benefited the television segment, suggests a stable revenue stream and strengthened relations with distribution partners, further solidifying its market position.

The solid year in entertainment and the record midterm election sales cycle in local TV segments signify robust performance in these areas. The record-breaking broadcasts of live sports events and plans for future sporting events hint at a lucrative avenue for advertising revenues, further augmenting the revenue streams. The healthy balance sheet of FOXA, marked by $4.3 billion in cash and about $7.2 billion in debt with a net leverage ratio of approximately one, provides the financial flexibility necessary for navigating through industry headwinds and macroeconomic uncertainties.

Risk & conclusion

One downside risk could be the broader industry trend of declining traditional TV advertising revenues. As audiences continue to fragment and shift towards digital platforms, advertising dollars may follow suit, potentially impacting FOXA's advertising revenue growth, especially in the television segment. For FOXA, advertising revenue accounts for ~44% of its revenue. This industry-wide challenge could pose a risk to achieving the projected revenue growth and may affect the valuation of FOXA, especially if the shift towards digital platforms accelerates or if FOXA's digital expansion efforts do not yield the anticipated results.

In conclusion, FOXA's consistent financial strength and resilience, demonstrated through its ability to sustain growth in both revenue and net margins, form a solid foundation for its outlook. This historical performance, coupled with a positive outlook for continued revenue expansion, underscores the company's financial stability. Valuation comparisons reveal FOXA's favourable position relative to its peer, suggesting the potential for stock price appreciation. Furthermore, recent quarterly results reinforce FOXA's promising trajectory, characterized by substantial revenue growth and profitability. Based on these, I recommend a buy rating for FOXA.