Following the sale of certain Fox Corp (FOX, Financial)(FOXA, Financial) assets to Disney, the “new” Fox Corp consists mostly of its predecessor’s “live” programming assets, particularly news and sports. Fox’s management has chosen to focus on “live” programming because it is less exposed to secular challenges in TV consumption/distribution than scripted content.
Specifically, “new” Fox consists of Fox News, Fox Sports, the Fox Broadcast TV Network, and a local TV station business. Fox News currently accounts for an estimated 70% of the company's total EBITDA. Regardless of one’s opinion about Fox News’ content, it has a very loyal audience and a strong brand. We believe this gives it relatively high pricing power over the cable operators. Wall Street analysts estimate that Fox News earns a 60%+ EBITDA margin, making it amongst the most profitable cable channels around. Fox News also has minimal capital intensity and, in our view, solid growth potential given the current level of its affiliate fees relative to the size and loyalty of its audience.
At initial purchase, we estimate Fox Corp. was trading for roughly 9x its trailing twelve-months EBIT (earnings before interest and taxes) or an owner’s earnings yield (net operating profit after tax/EV) of approximately 8%. We included the benefit or value for Fox’s Roku holding and its production studio in our enterprise value calculation. Fox earns a 20% ROE on a 20% operating margin and, in our view, should generate sufficient free cash flow given its low capital intensity and a tax shield resulting from the Disney transaction. It is also worth noting that there has been material insider buying at Fox as its founder and current co-Chairman has purchased over $36 million of its shares since June.
From Tweedy Browne (Trades, Portfolio)'s third-quarter 2019 commentary.
