Why This Analyst Is Unmoved By Fox's Strong Quarter

Fox Corp Class A FOXA reported a strong fiscal year 2020 second quarter, and investors have cheered the results by sending its shares higher. However, one analyst reacted to the results in a guarded manner.

The FOXA Analyst

Wells Fargo's Steven Cahall maintained an Underperform rating on the shares of Fox but raised the price target from $32 to $33.

The Fox Corp Thesis

Fox' second-quarter beat was big but cord-cutting and sports costs pose risks to the media company, Cahall said in a note.

The analyst noted that quarterly revenues of $3.78 billion and OIBDA of $261 million were way ahead of his as well as the consensus estimate, helped by strong affiliate revenue and TV ad revenue.

Cord-cutting, according to Cahall, is an omnipresent risk for Fox, as it has the most proportional exposure to U.S. affiliate revenue, at about 50% of consolidated revenue.

The analyst said he is currently maintaining his Cable/TV affiliate revenue growth for the second half relatively unchanged at 3% and 16%, respectively. The company estimates total affiliate revenue growth of about 7% in 2020, he added.

If the NFL rights renewal is concluded, the potential for a big step-up on broadcast packages could create a meaningful overhang for Fox, Cahall said in the note.

"We think the NFL is keen to claw back some retrans fees, and Walt Disney Co's DIS ABC could create additional competition for Sunday afternoon rights," the analyst wrote in the note.

Along with the accelerated repurchase and a semi-annual dividend, Wells Fargo expects more VC-style tuck-ins, especially around sports betting.

"While FOXA's lower leverage can explain some of its premium to Discovery Communications INC. DISCA and ViacomCBS Inc Class B VIAC, we think its greater weighting to cord cutting and NFL costs has been overlooked," the firm concluded.

FOXA Price Action

Shares of Fox Corp were down 4.20% to $37.04 at time of publication Thursday.

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