Fox Corp. stock slipped 2% on Monday to close at $35.92 after Guggenheim Partners analyst Michael Morris downgraded the shares to “neutral” from “buy.”
Morris, who also lowered his 12-month price target on the stock to $38 from $43, cited the company’s reliance on traditional carriage fees and upcoming renewals with pay-TV operators.
After two-thirds of Fox’s antecedent company, 21st Century Fox, was sold to Disney in a $71.3 billion deal, shares in the new stand-alone company began trading March 19. They have since lost 14% of their value. Monday’s dip came on a day when broader markets finished in positive territory, albeit on lighter trading volume ahead of the July 4 holiday.
In his note to clients, Morris expressed admiration for the potency of Fox News and Fox’s other broadcast and cable assets, but took note of comments by the company during its investor day in May. The company said during that presentation that it “does not see a substantial or profitable à la carte market in the near term for a Fox corporate bundle,” Morris recalled. Instead, it will “focus on growing subscription revenue through its traditional and vMVPD distribution relationships.”
By Guggenheim’s estimate, Fox has 42% of its affiliate revenue base up for renegotiation in fiscal 2020 and another 27% in fiscal 2021.
Morris nevertheless expects industry-leading aggregate subscriber growth from Fox (see chart at right). He also sees much of its programming as “must-have” and views the company as “well positioned among media peers.” Yet, the analyst also sees the value of carriage fees as baked into Fox’s valuation, which is ahead of industry peers.
One unknown is where Fox’s management team will invest resources as the company charts its new course without a stake in TV and film production or its longtime position in Hulu or other digital assets. “We expect management will remain disciplined in investment decisions but will be willing to absorb some near-term incremental cost to pursue long-term goals,” Morris predicted.
The downgrade by Morris comes after more upbeat views from analysts in recent weeks. Goldman Sachs initiated coverage of Fox last week, attaching a “buy” rating on the stock.