Please ensure Javascript is enabled for purposes of website accessibility

Why Fox Corporation Stock Was Headed Higher on Tuesday

By Jon Quast - Apr 28, 2020 at 4:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Do shares have 19% upside?

What happened

Media giant Fox Corporation (FOX -1.10%) (FOXA -0.77%) saw its shares head higher on Tuesday after analyst Kutgun Maral of RBC Capital initiated coverage of the stock with a buy rating. It appears that in the 30% broad market rally from March lows, investors are still looking for undervalued stock ideas.

Shares finished 4% higher on the day, and have now recovered 41% from lows hit last month.

A dollar bill folded into the shape of an arrow pointing up.

Image source: Getty Images.

So what

Fox Corporation generates revenue through advertising and affiliate fees across its cable programs and television networks. The problem is that Fox's audience is increasingly cutting the cord, opting for on-demand streaming video instead. It still has valuable content, like live sports, but some of that content is in question because of COVID-19. That may make it hard to attract advertisers, a near-term risk that Maral acknowledges.

However, Maral likes Fox's strong balance sheet and free-cash-flow generation. Given what he sees, he slapped the stock with an outperform rating and gave it a price target of $31 per share. At the time, Fox traded around $26, implying 19% upside. That would imply that Fox is a value stock at these prices.

Now what

Regarding the balance sheet, Fox is in a better position than some. At the end of the second quarter of fiscal 2020, it had around $2 billion in cash and cash equivalents on the balance sheet, and around $8 billion in noncurrent liabilities. Subsequent to Q2, the company made moves such as acquiring streaming platform Tubi and offering $600 million in senior notes, meaning these numbers are slightly different now. I'm not sure I'd necessarily call the balance sheet "strong," but Fox is certainly very liquid in this time of economic uncertainty.

Additionally, Fox is a profitable business. While Maral likes free cash flow, I prefer to look at net earnings by generally accepted accounting principles (GAAP). Through the first two quarters of fiscal 2020, Fox has earned $827 million. Some of that was from investment gains, but even subtracting those one-time items, it was profitable. Those earnings mean Fox trades below 10 times trailing earnings, which does indeed look cheap.

In the end, one analyst opinion doesn't make or break a long-term investing thesis. Investors need to assess Fox's plan to stay relevant as consumer demand shifts toward streaming (the Tubi acquisition is relevant). While shares may still have some upside this year, the company needs to guard against being left behind.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fox Corporation Stock Quote
Fox Corporation
FOXA
$36.22 (-0.77%) $0.28
Fox Corporation Stock Quote
Fox Corporation
FOX
$33.37 (-1.10%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.