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Why This Media Giant Shouldn’t Pass Unnoticed

January 23, 2014 | About:
Patricio Kehoe

Pato Kehoe

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The media entertainment industry is known for its high range income and significant entry barriers. However, Twenty-First Century Fox Inc. (FOX) has successfully maneuvered the market for decades. This media conglomerate of film studio and television broadcasting not only shines through its domestic market presence, but has also sustained a competitive advantage in international waters via its broadcast satellite television entities. So, let’s take a closer look at investment gurus Donald Yacktman and Mario Gabelli (Trades, Portfolio)’s recent share acquisition and decipher why its business model is one to be reckoned with.

Quality and Quantity United

Quality video content has continuously increased in value over the past years, and this firm has a made a point of following the money trail by producing and broadcasting an ample amount of high quality products. From award winning shows like “Modern Family” or “The Simpsons,” to its popular sports programming, Twenty-First Century Fox has constantly satisfied the market's thirst for entertainment. The News Corp (NWSA) spin-off, for one, was a highly beneficial strategy for this company, setting it apart as a pure-play entertainment firm. By concentrating resources and management on the cable network business and shaking off Rupert Murdoch’s print segment, the firm was able to boost its EBITDA growth as well as its return on capital (ROC). The current metrics of 28.80% and 154% respectively are quite impressive and will be highly beneficial for investors if they can be sustained.

In addition to this, advertisers have recently refocused on Fox, due to its popular news and sports programming. Since these are consumed in real time, they are less vulnerable to digital video recorders that skip commercial breaks. Also, the firm’s regional sports network holds local broadcasting rights for college sports, pro baseball and pro basketball teams, leaving it at a strong competitive advantage by creating entry barriers. These content contracts, that last several years before their renewal, establish Fox as the must-have channel for Pay-TV distributors in local markets, guaranteeing the company’s dominance in the sports entertainment segment.

International Presence Means Growth Opportunities

One of Twenty-First Century Fox’s most attractive features is its large global cable channel portfolio. With channels like FX, Fox Sports and Fox News, the firm’s international subscriber growth has risen consistently and will continue to do so for the next decade. In countries like Brazil or Australia, for example, where pay-TV penetration barely reaches 50%, there is plenty of room for growth and expansion. Therefore, the currently generated 15% operating profit in the cable segment could easily grow by a decimal point.

Another enticing aspect of this media giant is its successful film entertainment studio, which provides 75% of all operating profit, as well as a steady stream of cash flow for the televized side of the firm. The hits produced in the film studio are usually fed to the Fox broadcast networks, or Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN), via licensing and distribution agreements. This dual system of content creation and channel ownership is a highly sustainable business model which should help the company overcome any bumps in the road over the next 20 years. Furthermore, Fox channels’ high viewer rating is a very attractive feature for producers and writers looking to sell their ideas, which will ensure the firm's quality video content creation in the future.

Although the firm's programming will soon require a new coat of paint, due to audience drops for shows like “American Idol,” I still feel bullish about the media giant’s future. The film studio’s recent motion picture, “12 Years a Slave,” won a Golden Globe and is sure to be an Oscar nominee, which will easily boost the firm’s box-office receipts in America. Additionally, the company’s current price discount of 40% compared to the industry’s average is very tempting, given the growth opportunities that lie ahead.  

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Pato Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.0/5 (5 votes)

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