On June 28th, the old News Corp. was split into two publicly held companies: Twenty-First Century Fox (FOX) comprises the cable, film, and broadcasting assets of the old News Corp, and the “new’’ News Corp, which retains the old corporate name, comprises the former company’s publishing, Australian cable, and educational operations. (For each company, the “A” shares are publicly held; the other class is largely held by the Murdoch family.) In the nine months ended March 31, 2013, the businesses now grouped in 21st Century Fox contributed around 82% of the revenues and 92% of the operating profits of the old News Corp. Pro forma for the spinoff, the cable networks provided 62% operating profits in fiscal 2013, (ended June 30th), followed by films, 20%; television stations, 13%; and direct broadcast satellite TV, 6%. Pro forma operating income rose 9% in fiscal 2013, and pro forma earnings per share, before nonrecurring items, were $1.36, versus a pro forma $1.20 for fiscal 2012. Both of these, however, excluded $0.06 a share for the continuing costs of the cellphone hacking scandal in London that erupted in June, 2011. Twenty-First Century Fox has agreed to indemnify the new News Corp. for all future costs of the scandal.
At its August 8th investor day, 21st Century Fox (the company also uses this abbreviation) painted a rosy future, with EBITDA forecast to rise from a pro forma $6.3 billion in fiscal 2013 to $9.0 billion in fiscal 2016. Cable network programming is expected to lead the way, with growth in the low-teens. Every year, Fox launches at least a couple of new networks, both in the United States and abroad, and the new channels usually are profitable by the end of their second year. In the June quarter, cable EBITDA rose 25%, including an 18% gain in the U.S. and a 47% jump abroad. Advertising revenues increased modestly at home but grew 20% overseas, while revenues from affiliates were up 9% domestically, but 47% abroad. That pattern is expected to persist, since advertising grows slowly but cable agreements are renewed about every five years. That has allowed Fox to raise affiliate rates significantly in recent years.
The company also foresees double-digit EBITDA growth from its television stations, thanks, again, to rising affiliate and re-transmission fees. Adding to the pretty picture, Fox expects profits in the small direct broadcast satellite TV segment to double in the next few years as it turns around its wholly owned Sky Italia and improves results at Sky Deutschland. But that may be easier said than done. Finally, the company forecasts only single-digit growth from filmed entertainment, despite likely future successes from franchises such as Alvin and the Chipmunks, Ice Age, and at least one more Avatar. (At this point, a Titanic II seems improbable.)
Completing Fox’s predictions, depreciation and amortization is expected to increase only 22% in the next three years; interest costs should remain fairly stable, since Fox does not expect to pay down debt; and the income tax rate should rise somewhat. Continuing share repurchases could boost comparisons, as well. Fox bought in 4% of its stock last year, and the current buyback authorization of $4 billion would pay for a further 5% at FOXA’s recent price. To support its growth and repurchase plans, 21st Century Fox says it has around $4 billion of surplus cash on its balance sheet now that can be used for internal and external growth and stock repurchases without endangering its Baa credit rating.
All told, Fox does appear to have a bright future, though competitors Time Warner (TWX), Walt Disney (DIS - Free Disney Stock Report), Viacom (VIA), and Sony (SNE) will not be sitting on their hands. And fees from affiliates and for re-transmission rights may not rise as fast in the future as they have recently, which would crimp the company’s revenue growth. Still, we think prospects for annual share net growth of over 10% are good. But at its recent price, FOXA is commanding a price/earnings multiple of around 25, giving it a lofty relative multiple of about 1.4, a figure not usually associated with traditional businesses. The stock’s recent quotation leaves little room for mistakes, or, in our view, for long-term appreciation potential.
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.