Fox Is An Under-The-Radar Play On US Sports Gambling

U.S. sports betting stocks Penn National Gaming, Inc PENN and DraftKings Inc DKNG have been on fire so far in 2020. However, one analyst says sports betting is among the "hidden assets" that hold tremendous value for Fox Corp FOX FOXA.

The Analyst: Bank of America analyst Jessica Reif Ehrlich reiterated her Buy rating for Fox and raised her price target from $33 to $39.

The Thesis: Ehrlich said there are several reasons to expect Fox shares to outperform in the current environment. First, she is expecting advertising trends to rebound in coming quarters. Second, Fox has a healthy balance sheet with opportunities for share repurchases. And finally, she said Fox has exposure to “high-growth hidden assets.”

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Ehrlich values Fox's core business at $26 per share, slightly below the stock’s $29 share price. However, she names sports gambling among Fox’s hidden assets that add additional value to Fox shares.

Fox recently formed Fox Bet as part of a partnership with PokerStars parent company The Stars Group. In May 2019, Fox took a 4.99% stake in The Stars Group. Fox also has the option to acquire 50% of Stars' U.S. business within the next 10 years and the right to acquire an 18.5% stake in FanDuel Group in 2021.

"Fox's hidden assets collectively represent $13/s in our analysis (vs. $7/s prev.)—reflecting an accelerated consumer shift to digital (e.g. streaming and real estate) and robust consumer appetite for online gambling," Ehrlich wrote in a note.

Other hidden assets include Fox's 2.6% stake in Flutter, its 67% stake in Credible Labs, its Caffeine investment and its Tub investment.

Despite its exposure to sports betting, Fox shares are down 20.1% while Penn National shares are up 169% and DraftKings shares are up 407%.

Benzinga’s Take: The key difference between a stock like Fox and stocks like Penn and DraftKings is that gambling is only a tiny fraction of Fox’s business, whereas DraftKings and Penn are more pure-plays. However, given how large experts are projecting the U.S. sports gambling market will be, those so-called hidden assets could ultimately provide a major shot in the arm for Fox’s overall business.