Opportunity in Fox?
While the quarter was disappointing for the wide-moat firm, we are encouraged by the continued strength of the domestic cable business.
Fox (FOX) posted a slightly worse-than-expected fiscal third quarter, with revenue and EBITDA both slightly below our projections as the film studio continues to disappoint and the cable segment continues to suffer from demonetization in India. While the quarter was disappointing, we are encouraged by the continued strength of the domestic cable business which posted affiliate fee growth of 8%. We are maintaining our wide moat rating and our fair value estimate of $35. Currently trading in 4-star territory, the stock may offer an attractive entry point to investors.
Quarterly revenue of $7.56 billion was up 5% versus a year ago but 1% below our estimate, as growth at television (up 30%) and cable network (up 2%) was partially offset by the continued decline at filmed entertainment (down 3%). Cable network revenue was driven by domestic growth of 6% year over year, with affiliate fee revenue up 8%. The firm actually grew subscribers by 0.5% year over year, primarily at smaller channels. Unlike its peers, Fox did not see an acceleration in the loss of subscribers at its larger channels, which were down 1.5% versus same period last year. Domestic ad revenue was flat versus the prior year. Ad revenue benefited from strong ratings at FS1 and Fox News which were offset by decreased delivery at National Geographic.
International cable revenue fell by 7% as affiliate fee growth of mid-single digits was more than offset by the 18% decline in advertising revenue as STAR didn’t have the Twenty20 World Cup and demonetization continues to hamper the overall ad market in India. The 30% improvement at the television segment was driven by the Super Bowl which added about $500 million. The film division continues to struggle against tough comps as it was down 3%. EBITDA margin fell 40 basis points to 25.6% despite improvement at cable and broadcast which were more than offset by the 370 basis point decline at the film division.
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Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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