Fox Corp. Analyst Resumes Coverage With Neutral Rating, Sees “Secular Challenges”

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A veteran media analyst has resumed his coverage of Fox Corp., assigning a “market perform” (neutral) rating to its shares due to what he calls “secular challenges.”

Doug Creutz of Cowen & Co. had long covered 21st Century Fox, the entity that existed before the $71.3 billion sale of most of its assets to Disney. Fox Corp. began trading last March as a leaner and more focused company whose main operations are the Fox broadcast network, Fox News, Fox Sports and a lucrative portfolio of local TV stations.

Investors haven’t appeared to be terribly keen on the “New Fox” story in recent months. Shares have been under water since March, though they have steadily gained ground since October. On Thursday, the stock had gained 1% in mid-day trading at $36.57, still below the nearly $42 level where it began trading earlier this year.

Creutz has a 12-month price target of $32. In a note to clients, he wrote that the company’s stock is already fully valued. He cited its “high level of exposure to deteriorating basic cable subscriber trends, the lack of owned content with long-term value, and the lack of a meaningful OTT strategy.”

Fox has outperformed its broadcast network peers thus far in primetime this season, on the strength of reality hit The Masked Singer and strong ratings for the NFL’s Thursday Night Football. But the Disney deal has separated the company from its production studio, which Creutz sees as an impairment. Fox execs have said that their pivot to unscripted and sports programming, supplemented by animation, gives it a compelling offering that is in line with current viewership trends. But Creutz sees storm clouds on the horizon.

“Because the Fox network’s programming is so heavily skewed to sports (about two-thirds of TV segment programming spend), we expect margins to remain below those of broadcast peers,” the analyst wrote. “The relative lack of entertainment programming on Fox means there is less promotional benefit to running sports programming. Additionally, because of the lack of an internal studio, Fox is having to license content from outside suppliers, further pressuring economics.”

The push into sports, which has also been manifest in a new deal with the WWE and a recent extension of Major League Baseball rights, also carries risk in Creutz’s view.

“Any economic gains are likely to be short-term in nature, as the leagues are likely to recapture any value creation in the next round of rights negotiations, particularly with large internet-facing companies likely to join the competition for rights,” he wrote.

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