Fox: Underestimating The Post-Election Upswing

seekingalpha11-22

I have been positive on Fox for years, but underestimated the recent upswing, leading to a "Hold" rating despite strong 1Q25 results.Fox's revenue mix, focus on sports and news, and lack of heavy ...

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I'm not a very \"common\" investor in these sorts of media companies. I actually prefer investing in different communications companies in the sector - namely qualitative telcos, which I view as better investments due to yield, stability, upside, and so forth. FOX has also been one of my more controversial picks, given the perceived  political lean of the channel. As before, I don't really address the political implications beyond the financial results that this means for the investment. As before, I say that I'm interested in making money - and the fact is that Fox is still pretty good at making money if you buy it at the right price. Fox is attractive, by the way, not just because of the political perspective, but also because of the many things that Fox has under its belt.   FOX Investor Relations 1Q25 Earnings Re","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4125":"广播","FOX":"福克斯-B","BK4585":"ETF&股票定投概念","FOXA":"福克斯-A","BK4588":"碎股"},"translate_title":"福克斯：低估了选举后的上涨","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FOX":0.9,"FOXA":0.9},"content_text":"I have been positive on Fox for years, but underestimated the recent upswing, leading to a \"Hold\" rating despite strong 1Q25 results.Fox's revenue mix, focus on sports and news, and lack of heavy programming costs have insulated it from industry declines.Despite impressive growth and resilience, Fox's reliance on legacy TV and political cycles poses risks, with limited upside at current valuations.I maintain a \"Hold\" rating at $47/share, seeing Fox as a rotation target with a fair value around $40/share.   AlexPro9500/iStock Editorial via Getty Images I have been positive on Fox (NASDAQ:FOX) (NASDAQ:FOXA) for several years, viewing the company as undervalued for what it offers in terms of network, programming, and other advantages in the US-based market. Few seem to have followed my ratings/investments on this company in the past, and I went to a \"Hold\" rating in September of this year. Doing so was a mistake, and I considered changing the article before the election - but I didn't. So the mistake here was underestimating the upswing that we would see from Fox in a scenario such as the one we're now in. I don't discuss politics (on Seeking Alpha or anywhere else, really - I'm not that involved), I just do the finances, but I was of the stance that Donald Trump was going to be the new president - which also turned out to be the case in this election. And I underestimated the reaction that Fox as a company would see from such a set of results. The company has, since my last positive article, returned 53.17% compared to an S&P 500 change of around 37%, which is a meaningful level of outperformance. In this article, I will be looking at 1Q25 results and give you an update on my thesis for Fox as a company, both with the fundamentals as well as the presidency that we've currently in for the past few years. So, let's see what we have here. Fox Corporation: Upside even after a presidential win post surge? So the main question I will try to address in this article is whether Fox News, as a business, still has valuation upside for investors (us) after the surge we've recently seen. I'm not a very \"common\" investor in these sorts of media companies. I actually prefer investing in different communications companies in the sector - namely qualitative telcos, which I view as better investments due to yield, stability, upside, and so forth. FOX has also been one of my more controversial picks, given the perceived (or actual) political lean of the channel. As before, I don't really address the political implications beyond the financial results that this means for the investment. As before, I say that I'm interested in making money - and the fact is that Fox is still pretty good at making money if you buy it at the right price. Fox is attractive, by the way, not just because of the political perspective, but also because of the many things that Fox has under its belt.   FOX Investor Relations 1Q25 Earnings Report (FOX Investor Relations 1Q25 Earnings Report) The company is split on, in terms of revenues and expenses, on advertising and affiliate income. In terms of income, this is around 50/50 advertising and affiliate, with some changes now and then - usually affiliates higher than ads, but this is also heavily tilted by the political cycle or other considerations. Elections tend to spike ad income, for instance. In terms of expense, programming takes about 65%-75% of the expense for the company, with around 15% S&GA of the typical annual mix. Out of that programming expense, most is actually sports.  I'm far from the only analyst who for a long time has viewed Fox as undervalued. (Source: Morningstar). Other analysts have held an FV closer to $40-$45/share for some time for the Fox ticker, which is above mine, but has in the light of the election results been proven to be a somewhat \"correct\" overall estimate here. 1Q25 came in early November, about two weeks ago. The company's revenues and profits were impressive, though this can hardly be said to be surprising. Advertising, as mentioned, was up due to the election and this also affected viewership. Fox's strategy for several years has been a focus on sports and news, and this has paid off in spades - because it means that it typically lacks some of the very comparatively heavy programming costs that come with other productions. This has also allowed Fox to work at a premium, almost completely offsetting subscriber losses that have otherwise been the trend across the entire industry. My expectation for the company is for 2025 to be a superb year for Fox. This has only partially to do with the political situation, but is also related to sports. We're seeing increased ratings and series interest for baseball and football, and of course, there's the Super Bowl Broadcast. Despite being European, as an investor in Fox, it's important for me to stay \"on top\" of these things here. My expectation is not that Fox has found some sort of magic recipe for the decline of legacy television. It's my stance that this will actually continue at even an accelerated rate - but Fox now has a mix that's fairly well insulated from this decline. We can, in fact, see this in the numbers. With 11% top-line growth from both ads and affiliates, as well as meaningful growth in sublicensing and Tubi growth, the company is showing the competition how things should be done. Fox is reaching audiences using its advertising in the digital channel ahead of its peers, and this is trickling down to the bottom line. EBITDA is up over 20% due to significant operating leverage. Expenses that needed to be offset were sports right costs and expenses at the Tubi sub segment, but these were less than EBITDA growth. The argument that can and should be made against Tubi is of course one of profit, which the company has not been able to do. But the meaningful differentiation of the media strategy here with Fox it's what pulled me toward this company in the first place. Fox has been able to show significant resilience in relation to its peers which has been very impressive, thanks to the two areas of leaving entertainment production and also not operating subscriptions at a large scale.  It meshes with my own personal views on the media and content space and why I don't invest in companies like Netflix (NFLX) and others. I view these business models as inherently flawed and volatile. It's also why I don't like telcos, like Telia in Sweden, that have a content focus. Let me clarify though, I love the products produced - I just don't like (unfortunately) investing in their production because as an investor I have a hard time seeing net profit/payout from it. These differences also mean that FOX has an ad advantage compared to entertainment producers because sports shows and news shows are more likely to have viewers \"tune in\" and watch in real time, whereas everything in entertainment can be viewed as leisure. The inherent risk to the Fox approach is as follows, at least according to me. Because of its business model, this makes the company more dependent on legacy television, and this is not necessarily a good thing. It means that eventually Fox will have to change up its business model if they seek to contract up pay-TV subs. The secondary risk is, obviously, licensing and basically not owning anything that it sends (almost). It leaves Fox at the mercy of pricing from content creators. If NFLX decides it wants more, Fox has to pay up or not send. And this is also true for the sports rights, which are some of the company's major costs. Also, and now we're getting into the nitty-gritty, there's a question of how the company's programming is gaining traction with younger viewers. Fox is primarily reliant on older viewership. Young demographics seem unlikely to turn to TV for news, and this could hurt Fox in the long run. But upside? Upside could exist as well. The company has some of the blockbuster rights for sports in the US, it's a cable news leader (as I've covered before), and this in turn gives Fox pricing power. This has helped to insulate Fox from the declining affiliate/ad revenues that have been ongoing. And despite what I said above in risks, there's no current sign of declining viewership in sports or news.  Also, arguing about the lack of streaming/subs all you want, the company's lack of such operations means that it has heaps of cash to spend on licensing content, while not needing to do any of the capex. In this, I see this as much stronger for Fox relative to the risk. Valuation is as follows, following what I saw as a surprisingly good, even positive estimate, 1Q25. Valuation for Fox in 2025-2026: There could be an upside here, but it's very slim. In my last article, I went to a $38/share PT. This has been beaten by the company at this time. The company currently trades at an 11.8x P/E compared to an average of 10.7x. The company has never in its history since 7-8 years traded at above 15x P/E. At a yield of less than 1.3%, I view the company as somewhat unappealing as an income investment, unless we have a capital appreciation upside. However, the company meaningfully outpaces even the 2025E positive estimates, set to see a small rebound in 2026E, expected to decline, then grow again in 2027E, with an estimated EPS at the level of roughly $4.3/share. On a basis of 2027E and a 10.7x P/E, and the current estimates, we therefore see an annualized rate of return that's lower than 4% per year.   F.A.S.T graphs FOX Estimates & Returns (F.A.S.T graphs FOX Estimates & Returns)This is of course insufficient for the company to be an attractive investment for me. My raised price point goes to around $40/share, the company now has a decent upside to a somewhat higher multiple than before, and a higher rate of growth. These estimates are also fairly forecastable - analysts have a 100% two-year accuracy ratio (Source: F.A.S.T graphs Paywalled Link). This to me translates to a high reliability of these forecasts, and I expect surprises to stay in the framework of these forecasts. As you can see, my price point for Fox is not changing despite good results. This has to do with higher valuation, lower yield, and a relatively flat forecast. I believe the company will stick with its valuation range, but outperformance here is unlikely, as I see it. In fact, even the surge we've seen is something I consider to be a bit overplayed - which is why I maintain my rating and will be rotating my remaining position in Fox at almost $47/share. My thesis for the company as of 1Q25 is as follows. Thesis  Fox is one of the most appealing broadcasters and television companies in all of the US. It has solid fundamentals, it has a history, and it seems to have a great future, going forward. Its solid fundamentals and growth prospects make me consider it a \"Buy\" at a conservative share price. We had this conservative share price a few months back - we no longer do at this time. The current targeted share price I would consider fair based on targets and estimates is around $40/share. This is a raise of my PT. And this is despite ongoing political issues for the broadcaster, where I view Fox mostly on a financial level and as a fundamental investment. It was an attractive investment, but now is a solid \"Hold\" at almost $47/share. I also view Fox as a current rotation target.  Remember, I'm all about: Here are my criteria and how the company fulfills them.  This company is overall qualitative. This company is fundamentally safe/conservative and well run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.   The company fulfills three out of three quality indicators, and zero out of two valuation indicators. That means 3/5 \"stars\" here, which typically isn't enough. Based on this, and a valuation target of €140/share where I see a risk/reward-adjusted upside, that's attractive enough for me. I give the company a \"Hold\" rating as of November 2024.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485241706"}