Despite the rapid spread of COVID-19 inside the United States, Fox (FOX) (FOXA) has been able to show an outstanding performance in Q3 and the company is strong enough to weather the current crisis. While advertising revenue is expected to be down 25% to 35% in Q4, we should expect a swift recovery in Q1 and Q2 mostly thanks to the upcoming presidential elections that will attract new advertisers.
With P/E of 13x, Fox’s stock represents a good buying opportunity for value investors. Thanks to its superior assets and a number of competitive advantages, Fox has all the chances to drive growth once the pandemic is over. By raising $1.2 billion in debt at 3.05% and 3.5%, the company has enough liquidity to cover all of its expenses. At this stage, I believe that all the downside has already been priced into the stock and the risk of owning its shares at the current price is minimal.
No Need to Panic
I have been bullish on Fox since last year after the Murdoch family sold most of its entertainment assets to Disney (DIS) and made Fox a standalone company. While due to the pandemic my long position is currently in red territory, the company’s current share price represents a good entry point for new investors. Fox had a successful performance in Q3, as it was able to monetize the latest Super Bowl through its sports media assets. Revenues during the quarter increased by 25.1% Y/Y and were $3.44 billion. At the same time, digital advertising revenues showed impressive growth during the quarter and were up 45% Y/Y. In the first three months of the current calendar year, Fox generated more than $1.5 billion in FCF and its EBITDA was up 20%.
Considering this, I believe that Fox is in a strong position to weather the pandemic and create additional shareholder value along the way. With P/E of 13.2x, Fox trades below the industry’s median P/E of 15.48x and has a lot of catalysts to drive growth in the months to come.
Source: Yahoo Finance. The table was created by the author
While the company’s advertising revenues are expected to be down 25% to 30% in Q4, Fox’s shareholders shouldn’t worry too much about it. While other non-political channels will need some time to recover the lost advertising revenue, companies like Fox will only benefit from the pandemic. As we approach Presidential and Congressional elections, candidates from both sides of the aisle continue to pour more money into the TV advertising in record numbers. Despite the pandemic, the total ad spending for the current political season is expected to reach $6.7 billion, 12% more from the previous estimates of $6 billion. Since candidates cannot physically attend rallies and speak to their voters in real life, they mostly use TV ads to connect with their constituents. As CEO of Advertising Analytics Kyle Roberts said:
“These dollars can’t be allocated to the ground game right now. That does open up more dollars … that are getting appropriated to the air war.”
Since Fox is the only major conservative media organization in the United States, it will greatly benefit from more ad spending in this election cycle. In May alone, Fox’s Fox News channel was able to attract 44% more prime-time viewers in comparison to the last year. The channel also became the most-watched cable network 47th month in a row. This shows that Fox’s content continues to be popular among viewers and it’s very likely that advertising revenues will recover in Q3 and Q4.
While advertising and affiliate revenues will continue to account for the absolute majority of the company’s revenues, Fox has been active in diversifying its portfolio. The company’s recent purchase of a streaming service Tubi for $440 million shows that Fox is interested in expanding its presence in the streaming field. Before Tubi, the only streaming platform that Fox had was Fox Nation, a subscription service that featured political programs similar to those that are being aired on Fox Channel. Unlike Fox Nation, Tubi itself is a platform with more than 56,000 hours of movie and television programming content and it has a predominantly younger user base. In Q3 alone, the number of video hours that were viewed on Tubi increased by 150% Y/Y. The acquisition will help Fox to expand its direct-to-consumer capabilities and leverage its own programs on the service.
Considering all of this, I would say that Fox is not going to be hit hard by the pandemic. While Q4 results will be ugly, the expected recovery in Q1 and Q2 will offset some of the losses. With $3.2 billion in cash at the end of March, the company will be able to weather the current storm well. While Fox had $6.8 billion in debt at the end of Q3, it managed to raise an additional $1.2 billion through debt markets at 3.05% and 3.5% and use a portion of it to pre-fund its $750 million maturity due in 2022. After doing so, Fox no longer has any debt maturing anytime soon and all the downside is already priced into its stock. With enough liquidity at hand, Fox should expect a swift recovery by the end of the year, and with a P/E of 13.2x, its stock is a bargain at the current price.
Disclosure: I am/we are long FOX, FOXA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.