FOXA - Fox: Not Too Late To Dump It

2023-04-23 09:05:05 ET

Summary

• The $787.5 million settlement payment to Dominion is one of the largest ever defamation suit pay-outs in U.S. history.
• While FOX has plenty of cash to cover it ($4 billion+), the settlement may be just the tip of the iceberg as other lawsuits are in the works.
• Those suits could end up being a black cloud hovering over the company even as it retains its #1 cable "news" ratings with a devout following.
• FOX advertisers are fleeing while the potential for a large shareholder class-action lawsuit is a very real and growing possibility.

For Fox Corporation ( FOX ) shareholders, the settlement of the Dominion Voting Systems lawsuit for $787.5 million was certainly better than the $1.6 billion Dominion was seeking. However, the last-minute settlement came late considering the jury had already been seated and it seemed highly unlikely that FOX would have ever run the risk of having its leader, Rupert Murdoch, along with its headlining anchors - Tucker Carlson, Sean Hannity, Maria Bartiromo, Lou Dobbs, Jeanine Pirro and Dana Perino - testify at the trial as Dominion's lawyers were planning . One could only imagine the damage FOX faces having its high profile anchors grilled - under oath - by Dominion's lawyers given the incriminating texts showing that Murdoch and the FOX anchors knew they were lying about election fraud. That being the case, a pre-trial settlement always seemed the best way out for FOX from the beginning. The question is: what took so long? However, and despite a downdraft in the stock price on April 19th when the settlement was announced, the market appeared to take the settlement in stride. Indeed, the stock has already recovered roughly half that daily loss (see below). However, the stock is still down ~15% over the past year and in my opinion has farther downside given the Dominion suit may be just the tip of the iceberg.

The Settlement

As mentioned earlier, FOX can easily handle the $787.5 million settlement. I say that because FOX ended 2022 with $4 billion in cash. However, note that the settlement was more than 50% of FOX's TTM net income of $1.5 billion and equivalent to $1.45/share based on the 543 million shares outstanding at the end of Q2 FY23 . That pales in comparison to FOX's EPS of $0.58/share in Q2, and is $1.45/share that FOX could have otherwise allocated to the dividend or share buybacks. If I was a shareholder, I would not be pleased. That said, note FOX's Q2 report announced an incremental $3 billion share buyback authorization which included an "accelerated" $1 billion repurchase transaction.

In addition, FOX did achieve a victory of sorts in the settlement because the company was not required to make on-air apology to its faithful followers. A FOX spokesperson merely said:

We acknowledge the Court's rulings finding certain claims about Dominion to be false. This settlement reflects FOX's continued commitment to the highest journalistic standards . We are hopeful that our decision to resolve this dispute with Dominion amicably, instead of the acrimony of a divisive trial, allows the country to move forward from these issues."

That being the case, it would seem likely that it will be business as usual for the company going forward. If so, that is obviously an on-going risk for FOX shareholders. However, as Jim Geraghty of the Washington Post opined , the Fox News settlement likely signals "the end of an era for loose-cannon hosts." If true, one could argue it would negatively impact FOX News' "entertainment" value. Indeed, and as Geraghty points out, the FOX Business Network dumped Lou Dobbs and his program in February of 2021, just a day after Smartmatic filed a separate defamation lawsuit (see below).

Going Forward

While FOX can certainly handle the Dominion settlement, it may just be the tip of the iceberg. I say that because here are plethora of actual and potential lawsuits on the horizon.

For example, as previously mentioned, FOX is still being sued for defamation by Smartmatic , another voting technology company. Smartmatic is seeking $2.7 billion in damages from FOX and other defendants. Considering the Dominion settlement sets a precedent in that case, the odds appear to be stacked in Smartmatic's favor. Smartmatic lawyer Erik Connolly said:

Dominion’s litigation exposed some of the misconduct and damage caused by Fox’s disinformation campaign. Smartmatic will expose the rest. Smartmatic remains committed to clearing its name, recouping the significant damage done to the company, and holding Fox accountable for undermining democracy.

Indeed, Forbes thinks it likely FOX may have to write another "big check" to settle the Smartmatic lawsuit. After all, the fact remains that FOX can ill-afford to have Murdoch and its lead anchors face testifying - under oath - about the 2020 election lies they were perpetuating.

Meanwhile, Reuters has reported activity by FOX shareholders related to potential class action suits against the company. A complaint filed in Delaware Chancery Court stated the "Nature of the Action" was:

This derivative action arises from fiduciary breaches where the board of directors of overseeing a 24-hour news channel knowingly allowed the news channel to broadcast, promote, and perpetuate a false election fraud story in connection with the 2020 U.S. Presidential election in order to maintain the network’s ratings and viewers, who were known to be supporters of Donald Trump.

Reuters also reported that Fox Corp shareholders have requested company records related to Trump's election-rigging claims. Such requests, Reuters says, are typically a prelude to lawsuits seeking to make management liable for costs.

These are in addition to a derivative investor lawsuit suing Rupert and Lachlan Murdoch that Bloomberg reported on April 11th. This suit blames the Murdoch's for "letting Fox News spread lies about the 2020 election that led to defamation cases seeking up to $4 billion." This lawsuit, filed in Delaware’s Chancery Court , accuses the Murdochs and three other board members of “knowingly” letting the network’s hosts spread former President Donald Trump’s false claim that the election was stolen from him:

The board’s decision to chase viewers by promoting the false stolen election claims has exposed the company to public ridicule and negatively impacted the credibility of Fox News as a media ...

The more lawsuits against FOX that are settled in favor of the plaintiffs appear to make the chances of a large and significant shareholder class-action suit more likely with each passing day. Meantime, many of FOX News' favorite guests - people like Rudy Giuliani, Sidney Powell, and Mike Lindell - are also facing significant legal challenges for their roles in the false narrative that the 2020 election was stolen due to massive election fraud.

Earnings

Yet at the end of the day, a company's market value is arguably driven primarily by earnings. After all, it was FOX's management decisions to perpetuate the election fraud claims (even though they apparently knew they were false) because of its fear of losing viewers. From that perspective, note that the earnings estimates for FOX do not seem to have been affected much. As you can see, the settlement had relatively little effect on estimates that continue to show FOX's earnings going forward to be, generally, up on a yoy basis:

However, EPS estimates seldom take adverse litigation potential into account and FOX advertisers are fleeing. The NY Times reports companies like Papa John’s, Poshmark, Angie’s List have distanced themselves from “Tucker Carlson Tonight.” T-Mobile's CEO Mike Sievert announced its defection from the show in a memorable Twitter post: “Bye-bye, Tucker Carlson!”

Despite Carlson's highly rated show, Kara Alaimo - a PR expert who teaches at Hofstra University - said:

The show has almost no big-name advertisers left right now. This is just not an issue you want to be on the wrong side of, if you’re a mainstream brand.

Indeed, other advertising boycott initiatives are in the works. For example, a change.org petition to "Stop Advertising on FOX News", which includes a quote from the Financial Times’ U.S. National Editor:

The most effective thing Americans can do is boycott companies that advertise on Fox. They bankroll the poison that goes from the studio into Trump’s head. The second is vote.

Risks

Risks to my SELL advice include the fact that FOX is still the #1 cable "news" network as we head into another Presidential election year that will no doubt being strong candidate spending on the airwaves. Further, FOX obviously has a loyal following that likely wouldn't leave the network no matter what. In addition, the combination of FOX News, FOX Sports, and the FOX Network puts the company in a strong position to raise affiliate fees and makes the company pretty much a "must have" offering for TV distributors. Indeed, while FOX News is arguably the crown jewel of the corporation, FOX Sports has a strong portfolio of rights for NFL games (Sunday afternoon), FIFA World Cup, MLB, college football & basketball, and Nascar - most of which have terms from 3 to 10 years. That being the case, FOX is likely viewed by many consumers regardless of their political affiliation.

Summary & Conclusion

FOX stock is down ~15% over the past year. As a result, the company's forward P/E of only 9.2x. That relatively low valuation level combined with a strong market position may induce some investors to nibble on FOX stock. However, my opinion is that the company continues to face significant monetary exposure to additional derivative lawsuits as a result of the Dominion settlement - and that settlement sets a negative precedent for FOX. In addition, FOX appears to be set-up for significant headline risks for months if not years going forward. That being the case, investor sentiment will likely be negative toward FOX for some time to come. My advice is: SELL the stock. There are simply too many "dark cloud risks" swirling over the company. Some of those risks are likely to end up with even more shareholder capital ending up in the pockets of plaintiffs rather than in the pockets of FOX shareholders. As the old saying goes: "truth or consequences". And the FOX Corporation is being held accountable for perpetuating untruths about the 2020 election. That has - and will likely continue to have - significantly negative consequences for shareholders over at least the next 6-12 months.

For further details see: