Live Sports Costs And Streaming Shift Will Pressure Earnings And Margins Going Forward

Catalysts

About Fox

Fox Corporation is a media company focused on live news, sports and ad-supported streaming through properties such as FOX Sports, FOX News and Tubi.

What are the underlying business or industry changes driving this perspective?

• As viewing continues to migrate from traditional pay TV to streaming, FOX One’s stated ambition for only low to mid single digit millions of subscribers risks being insufficient to offset ongoing linear subscriber erosion. This could put long term pressure on distribution revenue growth and EBITDA.
• The escalating costs and long duration of premium sports rights, including the NFL, college football and Major League Baseball, could outpace advertising and affiliate fee growth over time. This may compress segment margins and limit earnings expansion in future contract cycles.
• While Tubi has reached early profitability, sustaining 20 to 25 percent margin targets will require ongoing heavy content and technology investment to defend share in an increasingly crowded streaming market. This could cap net margin improvement and reduce free cash flow conversion.
• Dependence on exceptional pricing and audience share at FOX News leaves the company exposed to any normalization in ratings or advertiser mix. Such a shift would slow advertising revenue growth and could materially affect consolidated EPS given the segment’s outsized profit contribution.
• The strategy to pursue M&A only in areas perceived as having tailwinds, while maintaining an industry leading balance sheet, risks overpaying for growth assets in competitive processes. This could dilute returns on invested capital and weigh on long term earnings per share.

Assumptions

This narrative explores a more pessimistic perspective on Fox compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Fox's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.4% today to 11.6% in 3 years time.
• The bearish analysts expect earnings to reach $1.9 billion (and earnings per share of $4.08) by about December 2028, down from $2.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the US Media industry at 16.1x.
• The bearish analysts expect the number of shares outstanding to decline by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained strength in the advertising market across news, sports, entertainment and Tubi, with Q1 advertising revenue already up 6 percent and described as the most robust since the company was created, could support higher than expected top line growth and stabilize or expand net margins and earnings.
• Structural demand for live sports and news, evidenced by double digit NFL audience growth, record college football viewership and FOX News ranking as the number one network in all television, may reinforce FOX’s pricing power and audience share, supporting resilient distribution and advertising revenue and buttressing EBITDA.
• The rapid scaling and early profitability of Tubi, with 27 percent revenue growth and an 18 percent increase in total viewing time, combined with management’s target for 20 to 25 percent margins in the medium term, could create a high margin digital growth engine that offsets linear pressures and lifts consolidated earnings.
• Progress in managing subscriber erosion through participation in skinny bundles, additive FOX One subscribers and distribution agnostic partnerships with Amazon, ESPN and Verizon, together with management’s guidance for continued distribution revenue growth, may underpin a more durable and growing distribution revenue base than assumed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Fox is $55.0, which represents up to two standard deviations below the consensus price target of $73.22. This valuation is based on what can be assumed as the expectations of Fox's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $97.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $16.0 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $74.3, the analyst price target of $55.0 is 35.1% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.