We initiated our coverage on Twenty-First Century Fox, Inc. (FOXA - Analyst Report) with a Neutral recommendation and a target price of $34.00.
Twenty-First Century Fox is a major diversified entertainment company. It commands a globally recognized and diversified brand portfolio which bolsters its position in the market.
Twenty-First Century Fox is trying to expand in the lucrative sports market where it competes with The Walt Disney Co’s (DIS - Analyst Report) sports coverage network, ESPN. The company recently launched Fox Sports 1 in Aug 2013 to emerge as a strong competitor in the world sports market.
The company is also trying to expand through acquisitions which include Sports Time Ohio, Yankees Entertainment, Eredivisie Media & Marketing and Fox Sports Asia. The company already boasts a well-recognized regional sports network, FSN (Fox Sports Net, Inc).
Further, affiliate fees at Twenty-First Century Fox shows an upward trend in the last couple of years. Affiliate fees are the major source of revenues for the Cable Network Programming segment and make a significant contribution to the total revenue.
The upside potential seen in affiliate fees and retransmission revenues is likely to work in the company’s favor. Moreover, management expects total earnings before interest, taxes, depreciation and amortization (EBITDA) to increase in the high single-digit to low double-digit range, above the $6.26 billion level for fiscal 2013, mainly driven by the Cable segment that constituted nearly 2/3 of EBITDA in the last year.
Moreover, Twenty-First Century Fox has been actively managing its cash flows and returning much of its free cash to shareholders through share repurchases and dividends. A widespread international presence adds to the positives.
On the flip side, Twenty-First Century Fox’s first-quarter fiscal 2014 bottom-line results were disappointing as it missed the Zacks Consensus Estimate and fell 13.2% year over year. Moreover, cautious commentary regarding Filmed Entertainment segment’s fiscal 2014 performance, dependence on third party-owned television stations and near-term headwinds (such as rise in programming costs) restrain us from becoming more constructive on the stock.
Moreover, advertising, which is highly susceptible to macroeconomic challenges, remains a primary revenue source for Twenty-First Century Fox. Additionally, cut-throat competition in the media industry from behemoths like CBS Corp. (CBS - Analyst Report) is a concern as well.
Other Stocks to Consider
Currently, Twenty-First Century Fox carries a Zacks Rank #3 (Hold). However, a better-ranked retail stock worth a look is DreamWorks Animation SKG Inc. (DWA - Analyst Report) with a Zacks Rank #2 (Buy).