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Why This Analyst Is Unmoved By Fox's Strong Quarter

February 6, 2020 2:42 pm
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Why This Analyst Is Unmoved By Fox's Strong Quarter

Fox Corp Class A (NASDAQ: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 (NYSE: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. (NASDAQ:DISCA) and ViacomCBS Inc Class B (NASDAQ:VIAC), we think its greater weighting to cord cutting and NFL costs has been overlooked," the firm concluded.

(NASDAQ:FOXA) Price Action

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

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