The Risk/Reward In 21st Century Fox Just Got Too Good To Resist

Reviewing Twenty-First Century Fox Inc FOXA's fiscal third-quarter results, Rosenblatt Securities said it feels the valuation of the shares is compelling, particularly if the Sky deal is completed.

Analyst Alan Gould noted the EBITDA and adjusted earnings per share of $1.94 billion and $0.54 beat the Street consensus estimates as well as his estimate. However, the analyst noted that domestic cable network ad growth, which was flat, came in less than expected. That said, the analyst indicated that the other cable network companies did not fare any better.

"Fox News was comparing against three presidential debates and FX was comparing against American Crime Story (the OJ series)," the analyst said.

Other Metrics

Rosenblatt Securities noted reported advertising revenue rose 16 percent, although on an adjusted basis, it was flat.

"FOX's US subscriber count actually grew by about 0.5 percent, its fully distributed networks declined by 1.5 percent, and the company has not seen any acceleration in subscriber losses since last quarter," the firm added.

The firm indicated Fox News, representing about 20 percent of the total EBITDA pre-Sky and 15 percent, including Sky, had been growing quicker than the corporate average. The firm believes the affiliate fees, accounting for 70 percent of Fox News' revenues, may not be affected near-term from the channel's issues, as affiliate deals typically run for four to five years.

Even as TV profit of $190 million was light, the firm said the filmed entertainment division beat its expectations, both on revenues and profits.

Viewing The Sky Deal Positively

The firm estimates the Sky deal to add 15–20 percent to the earnings per share, excluding the incremental non-cash purchase price accounting amortization to its 2018 and 2019 estimates.

"We view the Sky transaction positively given the earnings accretion, the knowledge of how capital will be allocated, the diversity, and our fundamental appreciation of the advantages of owning both content and distribution," the firm said of the Sky deal.

Outlook

On the outlook, Rosenblatt Securities noted that the company guided to high-single digit advertising growth at both the domestic and international cable networks for the fiscal fourth quarter.

Meanwhile, the firm raised its earnings per share estimate for the June quarter to $0.43 from $0.44 and that for 2017 to $2 from $1.95, with the biggest change in its estimate for the filmed entertainment profit estimate.

Upgrading To Buy

Rosenblatt Securities upgraded shares of Twenty-First Century Fox to Buy from Neutral, while it has a $33 price target for the shares.

Noting that the non-voting shares of the company fell 3 percent to $27.05 and the voting shares fell by 1.7 percent to $27.20 in the after-market session on Wednesday in reaction to the results, the firm said it is a strong buyer of either the voting or non-voting shares, particularly at the after-market price. The firm believes the shares now provide the best risk/reward ratio of the traditional media stocks.

In the pre-market trading, the non-voting FOXA shares were up 1.79 percent at $28.40 and the voting FOX shares were advancing 1.88 percent to $28.20.

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10 Stocks To Watch For May 11, 2017 _________ Image Credit: By 21st Century Fox [Public domain or Public domain], via Wikimedia Commons