Political Ad Dependency, Rising Costs, And Subscriber Challenges Threaten Future Growth

Key Takeaways

• Reluctance on political advertising and increased sports programming costs could pressure net margins, leading to future revenue instability.
  
• Heavy investment in Tubi and potential challenges in subscriber retention may impact earnings, raising concerns about sustained growth and profitability.
  
• Fox's successful execution of financial and strategic initiatives suggests sustained growth across news, sports, and streaming, enhancing revenue potential and profitability.

Catalysts

Operates as a news, sports, and entertainment company in the United States (U.S.).

• Investors may perceive Fox's reliance on political advertising as a risk for future revenue growth, especially since a significant portion of this revenue is cyclical and could decrease after election cycles, potentially leading to a decline in advertising revenue.
  
• Concerns about increased costs for sports programming rights, particularly with the Big Ten Expansion and other sporting events, might lead investors to believe that net margins will be pressured moving forward.
  
• Fox's heavy investment in Tubi, despite its current growth trajectory, may lead to worries about escalating operating costs impacting earnings, especially if the AVOD market faces increased competition or challenges in sustaining viewer growth and ad fill rates.
  
• With the expected cyclical decline in local political spending, Fox's television segment might face revenue deceleration, therefore, impacting overall EBITDA and raising concerns among investors about the stability of future earnings growth.
  
• Potential challenges in subscriber retention within the video bundle space could lead to concerns over future affiliate fee revenue growth if industry declines continue, impacting overall revenue projections for Fox.

Fox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fox's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.4% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $4.17) by about November 2027, down from $1.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2027 earnings, up from 11.1x today. This future PE is lower than the current PE for the US Media industry at 14.6x.
• Analysts expect the number of shares outstanding to decline by 2.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Fox Future Earnings Per Share Growth

Risks

• Fox Corporation demonstrated strong financial results with a 21% increase in EBITDA and 11% revenue growth, indicating a robust and successful strategy, which may enhance future revenue and earnings.
  
• Fox News experienced significant audience growth, with a 40% increase year-over-year and strong ratings across all major political demographics, suggesting sustained viewership that could positively impact advertising revenue.
  
• Tubi, Fox's streaming service, is projected to surpass $1 billion in revenue this fiscal year, driven by targeted advertising and unique audience reach, indicating potential for significant future revenue contributions.
  
• Fox Sports showed impressive audience engagement, with record ratings for its MLB postseason and strong viewership for NFL programming, suggesting continued strong advertising revenue in sports broadcasting.
  
• Fox's strategic and financial execution, including the potential for targeted political advertising spend and successful management of sports rights costs, indicates a well-balanced revenue stream and profit margin stability.

Valuation

• The analysts have a consensus price target of $45.15 for Fox based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $15.3 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $46.73, the analyst's price target of $45.15 is 3.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.