You're probably familiar with Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA). Perhaps you've watched Empire, The X-Files, The Simpsons, or American Idol on one of its broadcast affiliates earlier this week. You may have gone to the theaters recently to see one of its films, such as Deadpool or The Martian. If you're a baseball fan, you might have turned to Fox Sports One to catch an MLB game last season. And if you're interested in the ongoing U.S. presidential race, you probably watched the recent Republican debate on Fox News.
But what about its stock? In the next five minutes, you'll gain the knowledge you need to assess the company and the trends affecting its business.
How Twenty-First Century Fox makes money
Twenty-First Century Fox is a media giant with extensive assets, but all generally relate to the business of providing video entertainment. The company's three segments operate as follows:
- Cable networks: Twenty-First Century Fox owns many of the most popular pay-TV channels, dedicated to both sports and linear programming. Most Americans are familiar with FX, Fox Sports One, and Fox News, but the firm also operates dozens of networks in Europe, Latin America, and Asia. It has one particularly notable subsidiary, STAR India, which dominates the Indian television market. Last quarter, cable generated about 48% of Twenty-First Century Fox's adjusted revenue, mostly through a combination of subscription fees and advertising.
- Television: Twenty-First Century Fox owns the Fox Broadcasting Company. Through a network of local stations, some of which it owns, Fox provides over-the-air programming to the majority of Americans. The television business collects fees from its unowned affiliates, as well as advertising. Last quarter, this business generated nearly 22% of Twenty-First Century Fox's revenue.
- Filmed entertainment: Twenty-First Century Fox owns one of the largest film and television studios in the world. The unit produces a multitude of television staples, including Modern Family, and many hit theatrical films (last year's slate included Fantastic Four and The Martian). It distributes its own films, as well as those created by other studios, such as DreamWorks' Kung Fu Panda 3. It collects money at the box office and licenses its films and television shows out to streaming services and other networks. Last quarter, its film studio brought in around 30% of the company's revenue.
Twenty-First Century Fox also has equity stakes in a few outside ventures, but these, too, largely center around movies and television. It owns about one-third of the Internet streaming service Hulu, and nearly 40% of Sky, a British telecom. It also owns parts of Tata Sky (an Indian digital TV service), and half of Shine Group (a British television company).
While it doesn't directly effect Twenty-First Century Fox's business, investors should be aware of its unique shareholder structure. The company has two classes of common stock: class A and class B. Owners of class B shares can vote on the makeup of the company's board of directors, while owners of class A shares cannot. This is crucial, as the Murdoch family owns nearly 40% of Twenty-First Century Fox's class B shares. The Murdochs, then, effectively control the company -- and the company's management team reflects that. Rupert Murdoch and his sons Lachlan and James Murdoch sit on the company's board. Rupert and Lachlan are co-executive chairmen; James is the CEO.
The company's future prospects
Unfortunately for shareholders, Twenty-First Century Fox shares have performed poorly over the last 12 months, falling about 20% and underperforming the broader S&P 500. Its peers have likewise struggled -- Time Warner (NYSE:TWX.DL) shares have experienced a similar decline.
Media industry stocks have been under pressure due to fears that the paid-TV business model is destined to struggle in a world dominated by streaming. Twenty-First Century Fox's cable business, however, has actually remained relatively robust. Last quarter, its domestic subscriber base grew 1% on an annual basis, and international cable revenues grew 6% year-over-year. In general, its international exposure gives Twenty-First Century Fox room for greater upside, as it looks to capitalize on markets that are still maturing. Management drew particular attention to its Indian business, which is growing rapidly.
Its film studio remains a source of potential upside, as a series of hits could always drive additional revenue. And its partial ownership of Hulu -- although a minority stake -- gives it exposure to the growing market of streaming subscription services. In 2014, it attempted to acquire Time Warner, which might've brought additional benefits in the form of greater economies of scale, and more control over the film and TV industries, but was rebuffed. Consolidation remains possible, but perhaps unlikely.
How to value Twenty-First Century Fox
Twenty-First Century Fox is profitable, and can be valued using traditional metrics, including price-to-earnings ratios. The company's management prefers to use operating income before depreciation and amortization (OIBDA) to evaluate the performance of its underlying business rather than traditional earnings, however, as that factors out the earnings of the companies it holds equity in, such as Sky and Hulu.
Comparing its enterprise value -- essentially what it would cost to buy Twenty-First Century Fox outright -- to its OIBDA can produce a relative measure of value. The company's enterprise value is around $68.85 billion, and its OIBDA was $6.642 billion last year. That gives Twenty-First Century Fox an EV-to-OIBDA ratio of around 10.37. On that basis, rival Time Warner is slightly less expensive, with an EV/OIBDA of about 10. Using a more traditional metric -- trailing price-to-earnings -- also suggests that Twenty-First Century Fox is more expensive, though to a greater degree.
Overall, Twenty-First Century Fox, with its interests in television and film, shares many properties with its rivals, but is distinguished by its family control and international holdings. The future of the domestic television market remains uncertain, but Fox has many interesting assets it can leverage to succeed.