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

U.S. sports betting stocks Penn National Gaming, Inc (NASDAQ: PENN) and DraftKings Inc (NASDAQ: 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 (NASDAQ: FOX) (NASDAQ: 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.