FOXA - Fox: There's Still Upside In This Great Communications Company

Summary

• I've written about Fox a few times in the past, calling it an undervalued communications business.
• The company has plenty of upside both in its fundamentals and its potential growth. There are some concerns on the dynamics side of things, but these shouldn't hinder the thesis.
• I view Fox Corporation as a "BUY" here, and the company has outperformed since my last article, with my position seeing market outperformance.

Dear Readers/subscribers,

It surprises me and keeps surprising me, how readers tend to underestimate and ignore what I view as undervalued quality. Undervalued quality is sort of becoming my specialty both in investing, and coverage here on Seeking Alpha.

So why is Fox ( FOXA ) undervalued quality, and what makes this company interesting? Well, you can view one of my articles on the company. Or you can also see how the company, since my last article, has more than 5x'ed the market in the same timeframe.

The company's outperformance is in no way a surprise to me. Fox was way too undervalued when I last wrote about it, and I made this clear. In fact, what I said was that "no matter of how you slice the company, the Fox corporation is an attractive sort of business."

No ambiguity. Rarely am I so clear in what I think of a company and the risks or lack of risks associated with the business.

So, let's update Fox for 2023 and see why I think you still shouldn't ignore this company just because there might be some political instability between the various sides here.

Fox Corporation for 2023 - look beyond politics, and to investment

So, let's try to make it a thing to ignore the politics of something and instead look at the value as an investment and as a money-making venture for you. I know that some will be unable or unwilling to do this, but believe me that the net result of doing this is higher profitability.

Fox, after all, owns some of the most attractive media assets in all of the USA. This media empire owns network programming in cable, television, and producing as well as licensing and distributing content. With a battle for viewership among not just streaming services and the like, consumers are likely (and likely hopeful) to see an increase in programming quality, and with bad shows or content being discarded relatively quickly.

Fox has, after all, been on the leaderboard for 20 years straight based on Monday to Friday primetime numbers (Source: Nielsen), and finished 2021 as the #1 Cable Network in Mo-Fri primetime and total day viewers, cementing its track record for the 6th year running. So, you can argue the politics - but you can't argue the results or what company is "winning" here.

I personally watch a fair bit of Fox - just as I watch a fair bit of CNN - but this is because after having lived in the US for a while, I like to follow current events from a US perspective as well. European media tends to treat it more like it's far, far removed, and because I travel the world, I follow multiple news outlets from various continents.

Within the US though, and regardless of how Europeans and others watch or don't watch the programming, FOX is available in almost every home in America. Despite the company's outperformance, as we'll see when we start delving into valuation, there are still plenty of upsides left here.

FOX is a company with a relatively volatile trading history though. It's, for lack of a better word, "bouncy". From highs of almost $40 to lows of almost $20/share, it's easy to see why investors might be somewhat leery of the business. However, I'm here to tell you that you should look at the bigger picture.

FOX hasn't been a solid investment - unless you pay attention to valuation. If you discount the company to its media/communication peers and forecast on a low-double-digit level, you'll see that it's entirely possible to make money here.

The company is a BBB-rated broadcaster that owns at least a substantial part of the media landscape in one of the most significant nations on earth. It also has an extremely well-covered dividend of around 1.5% at today's level.

Do you know what's even more important? The fact that FOX is expected to generate substantial amounts of GAAP EPS for the coming few years, every indicator for 2023E to 2027E showing higher earnings and in turn, higher dividends.

FOX is without a doubt at least in part a play on the current political macro environment in the US, which seems centered around the mostly two-party system, and where the divide certainly seems to have deepened over the past few years. Now, based on the assumptions that this divide isn't going anywhere, and that people are going to be having differences of political opinion, I believe it can be said that FOX (or CNN for that matter) certainly isn't going anywhere. Both of these networks seem to have found their niche, and both of them have impressive amounts of viewers willing to watch their programming (and that's not even going beyond the political programming - FOX has plenty of shows that have very little to do with politics).

Based on these circumstances, I don't see any particular issues with the forecasts that are being called above. 2022E is likely to be a down-sort-of-year, with every year beyond that seeing a likely higher EPS trend, and, as a result, a dividend trend.

The latest results for FOX mostly confirm this to be the case. We have a different fiscal, so the last results are the 2Q23 results, and these were reported in early February of 2023.

FOX saw top-line growth of 4%, driven by affiliate fee revenue and other things, with advertising up 4% with much from the FIFA world cup, strong NFL results, higher political ad revenues, and growth a Tubi. These revenues trickled down to a net income of $321 for the quarter - which can be compared to the YoY loss we saw in the 2022 fiscal, though this was heavily impacted by investment fair value changes recognized in that period. This came to $0.58 per share for the net income in 2Q23.

Quarterly EBITDA was also up 71%.

It can be said that FOX's positive results were a product of an active political midterm news cycle, active sports, and good monetization on part of the company, as well as increasing digital expertise on part of the company. FOX has continued to buy back shares and has decided to accelerate this.

These results, and this buyback, are part of what has seen the company's returns improve by double-digits in a short time since my last article.

There wasn't really any one particular segment in the company's revenue results, that saw any meaningful deterioration YoY, and the company declared the latest dividend, an unchanged level from the previous one.

I suppose one of the larger pieces of news is that FOX is no longer looking at doing anything together with News Corp - so far that all committees were disbanded, and nothing more is being done. At this point, there's little more concrete information on the topic, though I expect there was a question of the scalability and suitability. This of course calls into question how FOX is thinking about the future as more of a stand-alone media company in the next couple of years. As of yet, the company hasn't left any sort of visibility as to what M&As, if any, they're targeting.

Let's look at the updated 2023E valuation targets.

Fox Corporation - An attractive media bet for 2023E

Now, I don't invest in a whole lot of media companies. Communication companies, yes. Absolutely - but not pure-play media as such. I don't particularly like the ebb and flow of content creation and the way it's expensed and depreciated, and the visibility, or lack thereof, of what something is actually worth. It's the reason I stay out of companies like Netflix ( NFLX ). However, Fox has an appealing set of portfolio assets that mix good advertising performance and other good publishing/broadcasting performance in a way that, to me, makes it a lot safer/more conservative than a company that produces a few hundred tv shows a year, many of which are of extremely dubious quality.

First off, I believe Fox is undervalued here. The company still trades at a 10.6x blended P/E, despite its estimates of growing earnings more than 23% in this fiscal or averaging a growth rate until 2025E of almost 14% per year, even with the "down" years we're seeing here.

The conservative potential for the company, and an 11-12x P/E is indeed conservative, calls for an upside of no less than 16.64% here, even as the company has outperformed the broader indexes by climbing over 13% since my last article. You may not see a lot of dividends from Fox, but I believe you're in a very good position to see market-outperforming returns.

The appeal goes beyond mere, simple forecasts and P/E. Fox is being treated and valued at a 1.6x revenue multiple, 1.3x sales, and less than 1.8x book multiple. This is less than most closer peers, including Comcast ( CMCSA ) and Nexstar ( NXST ). This also goes some way to explain the current targets, where analysts usually valued Fox at an average of $38-$44 over the past 24 months, and currently at $38.5/share. The current upside is certainly much lower than we saw, after a 13% outperformance, but 11 out of 21 analysts following the company are still at a positive "BUY" estimate or equivalent, with a 3-5% upside, compared to around 13-15% a few months ago.

I still forecast no less than a 9% annualized RoR minimum for FOX at this point based on earnings growth, which translates to a 25-40%+ total RoR until fiscal 2025-2026.

Fox remains well-managed, well-capitalized, and doesn't suffer from the same degree of "identity" crisis that CNN still seems to be under, with scandals seeming to happen successively to one another. Say what you want about Fox, but it knows its viewership, and the viewership knows Fox.

And contrary to popular belief, it's not even necessarily a political thing. Progressives and Liberals watch Fox as well. I believe anyone should consume a myriad or mix of media to make sure to get a nuanced picture of things if one decides to view media at all - I know plenty of investors that only watch economic news, and skip most of the rest.

However, whether I view something or not does dictate whether I invest in it or not. You may get the picture that I do not like Netflix - but I do, and I watch plenty of the shows it offers. I just don't want to be investing in the company. There are many companies like that - companies where I will happily use, eat or enjoy the products or services, but where I don't believe that it makes for a good overall investment.

Fox, on the other hand, is a good investment.

That is what I believe, and that is why this is my thesis.

Thesis

• Fox is one of the more 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.
• The current targeted share price I would consider fair based on targets and estimates is around $38/share.
• I consider Fox Corp a "BUY" here.

Remember, I'm all about :

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (Italicized) .

• This company is overall qualitative.
• This company is fundamentally safe/conservative & 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 is no longer cheap as such, but I still view it as a "BUY" here.

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