During the second quarter, some of the largest detractors included Fox (FOX), P&G (PG), and Samsung (XKRX:005935), which are among our high conviction long-term investments. We think these investments all offer significant long-term value despite their recent unpopularity.
Fox (FOX) remains one of our favorite holdings despite pulling back in the second quarter. Recently, Fox announced a series of management changes, appointing James Murdoch as Chief Executive Officer of the company with Rupert Murdoch and Lachlan Murdoch being named Co-Executive Chairmen. We believe James is a talented leader. He previously was Chief Executive Officer of BSkyB for several years, and has been extensively involved in Fox’s operations for nearly two decades. James takes the Chief Executive Officer title from his father, Rupert, who has been running the business and its predecessors for a remarkable 60+ years.
We believe Fox is extremely well-positioned for significant growth in earnings-per-share over the next several years. We think the company is getting little credit for several of its recent investments, including its strong market position in India, where the company has nearly 25% of the television viewing audience. The business in India is running near break-even, as costs are high in the short-term due to one-off expenses like World Cup cricket rights and the build-out of a mobile platform. Domestically, Fox is making investments to create new channels like Fox Sports 1 and to turn around the Fox Broadcasting Network, which has suffered from weak ratings recently. The expenses associated with the investments will decline over time, and we expect profit margins to rebound while the company achieves solid revenue growth and free cash flow.
Fox is in the “penalty box” because the company is trading potentially higher current profits for far greater value in the future. This is exactly the way we like to see our businesses managed. However, the stock market currently favors companies that are maximizing profits today and penalizing those willing to invest for the future. We think this will set Fox up for strong outperformance over time and believe our patience will be richly rewarded.
From Yacktman Focused Fund (Trades, Portfolio)'s 2nd Quarter 2015 Commentary.
