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For the final quarter of 2022, Fox Corp. could celebrate a 4 percent advertising revenue gain. Amid economic clouds late in the year, executive chairman and CEO Lachlan Murdoch said in February that his team was “mindful of current macroeconomic conditions,” but touted that “the durability of our brands and Fox’s ability to deliver audiences at scale position us well to navigate this uncertainty.”
The broader industry sentiment at the time was that ad trends would stabilize early in 2023.
Now, however, whether they call it “trimming” or “revising,” some Wall Street experts are cutting their advertising forecasts for Fox, with at least one also seeing possible downside for other sector giants.
On March 27 alone, two observers lowered their Fox forecasts for the January to June period. Guggenheim analyst Michael Morris in the headline of a report said he was “Trimming Fox News Estimates on Persistent Advertising Softness,” while maintaining his “buy” rating and $40 stock price target on the company. And Steven Cahall, an analyst at Wells Fargo, unveiled “negative advertising revisions” for Fox, while also sticking to his “overweight” rating and $44 target.
Before that, Credit Suisse’s Douglas Mitchelson had on Friday updated his cable networks ad forecast for the current fiscal third quarter from a drop of 4 percent to a decline of 9 percent.
All three cited softer direct-response ad momentum, which had already affected Fox News in the final quarter of 2022. Direct-response ads traditionally fetch somewhat lower prices, but give networks more say on when they run.
The weakness here was also a reason for Bank of America analyst Jessica Reif Ehrlich to lower her total quarterly revenue growth forecast for Fox from 18 percent to 17 percent and switch from a 1 percent growth forecast for operating income before depreciation and amortization (OIBDA) to a 1 percent drop estimate, “reflecting continued softness in digital advertising (particularly programmatic, although Tubi trends remained healthy) and direct response advertising (in Fox News).”
But she went a step further than her peers, downgrading Fox’s stock from “buy” to “neutral” and slashing her price target by $8 to $34. “While we do not project any significant near-term degradation in fundamentals, we struggle to find near-term catalysts,” Reif Ehrlich explained. “Prior catalysts, such as the 2023 Super Bowl, affiliate renewals, midterm election cycle and the World Cup, have either passed or are already contemplated in consensus forecasts. Given Fox’s asset mix, we believe they have the greatest relative exposure to the secular headwinds in cord-cutting, while it remains unclear what their longer-term strategic plans are if these trends persist or worsen.”
Her Street colleagues, meanwhile, have focused mainly on updating their ad models for the company.
Mitchelson estimated that Fox’s direct-response advertising revenue would be down 27 percent for the January to March period, following a 53 percent decrease in the final quarter of 2022. “Fox News was the most impacted by significantly lower direct response volume, down 62 percent year-over-year in January,” the analyst wrote in his report. He did, however, keep his “neutral” rating and $35 stock price target on Fox.
Monday’s two latest reductions to Fox ad projections follow stock market and business confidence jitters caused by the recent challenges in the banking sector and came on the same day as media investment company Magna lowered its forecast for U.S. advertising for 2023. After a 5.7 percent gain in 2022 to a record $315 billion, U.S. media owners’ advertising revenue will rise 3.4 percent this year, down from the previously forecast 3.7 percent, it said. “Ad spend slowed down significantly through the second half, and fourth quarter ad sales were flat year-over-year,” Magna explained. For 2023, it highlighted “mixed economic signals” and “financial turbulence [that] is generating anxiety among consumers and businesses.”
The ad downgrade came after entertainment industry CEOs in recent months spoke of a challenging ad environment. Among others, Warner Bros. Discovery CEO David Zaslav has called the market “very weak,” and Paramount CEO Bob Bakish has described it as “cyclically tough.” And Cahall warned in a report on Friday: “The fallout from the banking sector is expected to weigh on consumer/advertiser psychology and push out any ad rebound.” However, sports advertising has been booming.
So why is Wall Street getting more cautious on Fox? Morris explained that he updated his Fox financial models “to better reflect ongoing softness in direct-response advertising at the company’s Fox News business,” noting that management had indicated it during its February earnings call for the fourth quarter of calendar year 2022, which was the second quarter of Fox’s fiscal year that ends in June.
Morris’ revised cable networks unit ad outlook for the current quarter “reflects a full quarter impact” of that softness, followed by its continued impact in the April to June period. Morris now projects cable networks unit earnings before interest, taxes, depreciation and amortization (EBITDA) for the current January to March quarter of $773 million, down from $787 million. Ad revenue in the division he now estimates at $307 million, down 9.5 percent from the year-ago period and down from his previous projection of $334 million, or a 1.5 percent drop. For the April to June quarter, Morris predicts Fox’s cable networks ad revenue will hit $334 million, down 6.7 percent from the year-ago period and from his prior forecast of $359 million, or a gain of 0.4 percent.
Cahall’s new model reduces his cable networks unit ad revenue by 6 percent from his prior estimate to $307 million, now predicting a 9 percent decrease from the year-ago period instead of a 3 percent drop. Like Morris, he cited “continued direct-response weakness” as the key driver after “direct-response weakened at Fox News coming out of the fiscal second quarter.” And he predicted that the current Wall Street consensus estimate of $331 million would be coming down.
For the upcoming quarter, Cahall forecasts another 9 percent cable channel unit ad drop, leading him to cut his full fiscal year estimate for Fox by 3 percent to $1.40 billion, down 4 percent from $1.46 billion in the previous fiscal year and below the Wall Street consensus of $1.46 billion.
The Wells Fargo analyst also sees fallout from that for other entertainment stocks. “Our revision is a negative read-through to peers such as Paramount Global, Walt Disney, Comcast’s NBCUniversal, while we view Warner Bros. Discovery’s calendar year first-quarter estimates as derisked enough,” Cahall wrote, noting his forecast of a 13 percent ad drop for WBD. “Ads are still weak after what was viewed as a trough in December and stabilization thereafter.” As a result, he called his forecasts for 8 percent ad revenue drops in the current quarter at Paramount and Disney, as well as a 5 percent decline at NBCU, excluding the 2022 Olympics, as examples of firms that “may have downside.”
Fox shares have traded between a 52-week low of $28.01 and a 52-week high of $41.14. In early Tuesday trading, the stock was down 2.6 percent at $32.75, up 8 percent for the year to date.
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