Analyst: 21st Century Fox 'Close to Fully Valued'

 

A little more than a week after the split of Rupert Murdoch's empire into publishing company News Corp and entertainment conglomerate 21st Century Fox, a Wall Street analyst has launched coverage of the latter by saying it was "close to fully valued."

Citing the stock's early strength, Barclays Capital analyst Anthony DiClemente on Tuesday initiated his coverage with an "equal weight" rating, which is similar to other analysts' "neutral" rating, and a $33 target price. He said the company's "longer-term thesis" remained "attractive."

As reported, the stocks of 21st Century Fox and News Corp rose during their first trading week after the split. Many analysts have predicted more upside for the entertainment stock.

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On Monday, Fox shares declined minimally to $30.37.

"Given recent strength in shares, near-term upside may be limited," argued DiClemente. "The market cap of Fox is $70 billion, or 20 percent higher than our prior implied target valuation of pre-split News Corp." He added: "While we believe in the long-term growth story at Fox, there may be less room for upside near-term."

With the help of carriage renewals for Fox News, ratings growth at FX and upside for the Fox International channels, 21st Century Fox will continue to report affiliate fee growth "near the high end of its peers," according to the analyst. "However, launch investments for new networks [Fox Sports 1 and FXX] could exceed $200 million in fiscal year 2014." That will drag down cable networks operating profit growth.

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For the Fox broadcast business, DiClemente predicted "long-term retrans fee growth" offset by "recent ratings softness." He particularly cited American Idol's ratings drop, which he said missed "our already modest expectations and leading to increased make-goods for advertisers."

At the film and TV studio, DiClemente expects continued strength despite potential negative near-time news for such box-office disappointments as The Internship.

Calling the studio "a scale player in a very healthy eco-system," he wrote: "The intensifying demand from traditional and new digital distributors for TV/film content should illustrate Fox's scale advantage in content over time … That said, recent theatrical film releases have had mixed results and could weigh on results in the near term."

The Barclays analyst expects 21st Century Fox management to address questions about stock buyback plans at an Aug. 8 investor day. "Buybacks have slowed recently into the separation but may already be re-accelerating," he said.

E-mail: Georg.Szalai@THR.com
Twitter: @georgszalai

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