<SPECIAL FEATURE>
February 9, 1999

Stocks Fools Love

Fox Entertainment Group
by Yi-Hsin Chang (TMF Puck)

Trading at 25 5/16 as of February 8, 1999

Extending Peter Lynch's well-known mantra "Buy what you know," I say buy what you watch. In fact, buy what everyone watches.

Yes, I'm talking about TV but, more specifically, I'm talking about Fox Entertainment Group (NYSE: FOX), the recent spin-off of Rupert Murdoch's News Corp. (NYSE: NWS). My TV viewing -- as well as that of most people I know -- largely revolves around the Fox Network and shows produced by Fox.

Every Sunday, my husband and I watch our favorite TV show, The X-Files, at 9 p.m. We used to watch The Simpsons and King of the Hill,too, right before, but we've gotten out of the habit since Hank Hill and family moved to Tuesday nights and were replaced by That (awful) '70s Show. After The X-Files, we click over to ABC to catch The Practice which, like The X-Files, The Simpsons,and King of the Hill, is made by Twentieth Century Fox Television.

We plan our Monday nights around Ally McBeal on Fox. Then, on Tuesdays, there's NYPD Blue, which airs on ABC but is distributed by Fox. On Saturday nights, when we're home, we turn to CBS to see Martial Law, which is co-produced by Fox and CBS. Besides South Park on Comedy Central, that's about all we watch regularly.

Other popular Fox shows include Party of Five (which launched the careers of both Jennifer Love Hewitt and Neve Campbell), Melrose Place, and Beverly Hills, 90210. Among the successful shows produced by Fox that appear on other networks are Buffy the Vampire Slayer, Chicago Hope, and Dharma and Greg. In fact, Fox is the leading TV production studio, based on the number of weekly programming hours ordered for broadcast on network television.

If you watched the World Series last October and Super Bowl XXXIII at the end of January, you'd know that these mothers of all sporting events were televised by none other than the Fox Network. In fact, for this year's Super Bowl, Fox successfully sold 30-second spots to advertisers for $1.6 million -- more than 20% above last year. In addition, through its Fox/Liberty Network joint venture with Liberty Media (Nasdaq: LBTYA), a division of Tele-CommunicationsInc. (Nasdaq: TCOMA), Fox has interests in or is affiliated with 26 regional sports networks that reach more than 62 million households by brilliantly broadcasting live professional and college sports that appeal to specific local markets.

Fox's dominance goes beyond the TV set and onto the big screen. During its fiscal 1998 (ended June 30), the Fox film studio ranked first in worldwide gross box office receipts. Since the beginning of fiscal 1996, it has produced and/or distributed such hot movies as Independence Day, The Star Wars Trilogy Special Edition, The Full Monty, There's Something About Mary, and Titanic (with Paramount). Fox is also in the enviable position of owning the distribution rights to George Lucas' much anticipated Star Wars prequels, the first of which, Episode I: The Phantom Menace, is scheduled for release May 21.

Fox has mastered the art of vertical integration. Take The X-Files, for example. The series, which already has attracted a cult following akin to Star Trek, is made by Twentieth Century Fox Television and airs on the Fox Network, which sells the national ad spots, leaving Fox's 203 affiliated TV stations (22 of which are Fox-owned and operated) to sell the local ads. Twentieth Century Television then syndicates The X-Files to F/X as well as other TV stations, while Fox Film Entertainment franchises the series abroad. Last summer, Fox released the first X-Files movie, which has since been distributed on home video and cable, and has been licensed for merchandising.

It's hard to believe that it wasn't long ago that Fox wasn't taken seriously by the "Big Three" networks. But, after paving the way for upstarts WB and UPN, Fox is now included in the "Big Four" of networks. In fact, Fox's viewership among the coveted age 18-49 demographic has improved from fourth place in the 1987-1988 season to first place for the recent all-important November sweeps period. The median age of Fox viewers is 33, compared with 40 for both ABC and NBC, and 52 for CBS.

But despite winning over viewers and being one of the fastest-growing media companies, Fox Entertainment still isn't getting the same respect from investors that its rivals do. Fox is only trading at around 9.4 times calendar year 1999 projected EBITDA (earnings before interest, taxes, depreciation, and amortization), adjusted for off-balance-sheet assets, according to Merrill Lynch. That compares with multiples of 14.5 for Time Warner (NYSE: TWX), 14 for Walt Disney Co. (NYSE: DIS), and 12.1 for Viacom (AMEX: VIA).

What's more, Fox has a solid balance sheet on top of strong projected free cash flow. Merrill estimates that Fox will have less than $2 billion in net debt at the end of fiscal 1999, and debt of $1.3 billion at the end of 2000, which implies a debt-to-EBITDA ratio of just 1.8 for 1999 and only 1.1 for 2000.

Merrill also predicts that Episode I: The Phantom Menace could be as successful as Titanic and rake in more than $200 million in profits for Fox. The brokerage firm just raised its 6-to-12-month price target for Fox shares to $31 -- from the $29 it set in December -- with an 18-month objective of $35. That'd be a 38% to 56% increase from its November initial offering price of $22.50.

Last October, I went to bat for News Corp. in a Dueling Fools bout. Fox Entertainment is an even purer U.S. entertainment play than its parent, and it truly entertains. With the newly announced marketing deal between Yahoo! (Nasdaq: YHOO) and nine Fox businesses, including Fox Sports, Fox News Channel, and Twentieth Century Fox Film (could this be a precursor to a News Corp. bid to acquire Yahoo!?), Fox Entertainment is poised for strong growth.

That's why I'm making Fox my Valentine stock to love. I predict that it will soon be getting a lot of love from Wall Street and investors at large.

Fox Entertainment Company Information:
Trades on the NYSE under symbol FOX
Web Site: www.newscorp.com

Company Address:
1211 Avenue of the Americas
New York, NY 10036

Other Related Links:
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That's Entertainment -- Fool on the Hill 12/28/98
News Corp. Duel -- 10/21/98

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A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.