Veteran Wall Street media analyst Michael Nathanson got straight to the point in his latest note to clients of his firm, MoffettNathanson.
“Fox’s early life as a new company has been nothing short of disappointing,” he wrote in the note, which is titled “Please Turn the Page.” Cord-cutting and the associated softening of carriage revenue, he said, have hurt the company out of the gate, though he also sees much brighter days ahead for the company.
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Class A shares of Fox, which are hovering just below $31, have dropped 26% since they began trading in March. The company is a far leaner enterprise in the wake of the $71.3 billion Disney acquisition of most of its predecessor, 21st Century Fox. The deal left “New Fox” with a TV-centric portfolio consisting mainly of the namesake broadcast network, Fox News, Fox Sports and a string of cash-generating local stations.
Nathanson lowered his 12-month price target on Fox to $39 from $42 and reduced several other projected financial measures. But he maintained his “buy” rating on the stock. “We see major catalysts on the horizon that should improve the perception of the company and push the stock higher,” he wrote.
Among the boosts Nathanson sees: “Fox’s affiliate fee pricing power due to their strength in live
sports and news should become obvious as they roll into calendar year 2020.”
The company recently sealed new carriage deals with Dish and Cox, as well as reverse retransmission deals with Nexstar (the No. 1 owner of local TV stations) and Gray. In the coming months, major deals with Charter and other pay-TV operators will come up for renewal — a risk in today’s turbulent distribution environment, but also an opportunity for fee increases.
Ratings for Fox programming — notably NFL games and the fall primetime lineup — have been strong, adding to momentum, and local stations will start to pull in historic ad dollars tied to the 2020 presidential race.
Cord-cutting has hurt the new enterprise, in Nathanson’s view. “This year’s acceleration in cord-cutting has been materially worse than we (or anyone else) expected at the start of the year,” he wrote.
With the broadcast network now separated from the studio operation now under Disney’s tent, one key strategic question for Fox has been its supply chain for the linear broadcast network. Being less able to own the shows it airs (the goal of every network given the industry’s economics) was seen as a disadvantage for Fox, but the network under entertainment boss Charlie Collier has bucked expectations. Leaning into its longtime strength in animation, Fox acquired Bento Box and put several new series into the pipeline.
“While we were surprised that the company recommitted to investing in scripted content at Fox Broadcasting,” Nathanson wrote, “we think that the market might be underestimating the near-term revenue potential in this division.”
In its recent SEC filings, Fox estimated cash payments for sports programming rights will be nearly $4 billion in fiscal 2020, which Nathanson said is about 41% of the overall programming cost base. “This
means around 60% of Fox’s cost base is not fixed and likely to be aggressively managed in light of revenue changes.”