Murdoch Sons' First Challenges: Fix Fox and Win Over Wall Street

James and Lachlan Murdoch

Broadcast TV weakness will be center stage when James and Lachlan take over July 1 and analysts scrutinize any moves as the share price lags behind Hollywood rivals.

This story first appeared in the July 3 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

Rupert Murdoch's decision to promote sons James Murdoch to CEO and Lachlan Murdoch to executive co-chairman of 21st Century Fox as of July 1 comes as the conglomerate's share price lags behind those of its Hollywood peers. Stock movements can take time, but one thing Wall Street will want to see from Fox is a reversal of that trajectory.

As of June 22, just shy of the midway point of 2015, Fox stock was down 13 percent for the year to-date, compared with a 3 percent gain for the broad-based S&P 500 stock index. Among the seven major media companies, Fox has fared worst and is far behind Sony and Walt Disney, up 49 percent and 21 percent, respectively. Among the Big 7, only Fox and Viacom — also seeing management scrutiny with the health decline of 92-year-old executive chairman Sumner Redstone — are off, with analysts saying most of the underperformance is due to ratings issues for networks and other business challenges.

In a sign of Wall Street's confidence in the succession and its signal of management stability, Fox stock hasn't moved much since the plan was revealed June 11. But given the elder Murdoch's decision to elevate his sons while COO Chase Carey moves into an advisory role and longtime lieutenant David Hill exits to run a production company, Fox will be in the spotlight.

A primary issue the Murdochs and their executive team must address is weakness in Fox's broadcasting unit, which reported a 22 percent decline in revenue to $1.2 billion and a 51 percent decline in operating income to $141 million in the most recent quarter. Some of the shortfall can be blamed on the lack of a Super Bowl, but the company also suffered lower overall ratings for the Fox network, leading to a 7 percent decline in ad revenue.

The Murdoch brothers are expected to work with Fox Networks Group chairman and CEO Peter Rice and new Fox TV Group chairmen Gary Newman and Dana Walden to reverse those skids with more hits like Empire and a replacement for onetime champ American Idol, which ends in May.

21st Century Fox already has lowered its earnings forecast for the current fiscal year and, more crucially, for next. For the fiscal year starting midyear 2015, it cut its forecast to the mid-$7 billion range from about $8 billion, citing a weak broadcast business and unfavorable currency exchange rates, which affect Fox more than some competitors given its global reach.

"We believe Fox needs to prove its accelerated growth … is sustainable before regaining investors' confidence," said MoffettNathanson analyst Michael Nathanson when he lowered his fiscal 2016 forecast to $7.05 billion.

Some predict Fox will cut guidance again when it next reports earnings. No date for the next report has been set, but the company typically reports in early August. Cowen analyst Doug Creutz says such a move would give the Murdochs "a chance to start with expectations having been reset to a presumably low bar."

Rupert Murdoch built his empire by taking big risks, like spending a small fortune to challenge CNN with Fox News Channel. His  approach also has misfired, as when he bought social media pioneer MySpace for $580 million and sold it six years later for about $35 million. Some Wall Street observers expect James, 42, and Lachlan, 43, to be more cautious than their 84- year-old father.

While many on the Street predict that there will likely be no huge immediate news once the sons' elevation kicks in, analysts are saying there could be some moves near-term, for example as part of the next earnings report.

"I wonder if, in James Murdoch's first act, the company may up the share buyback to cushion the lower-guidance blow," says Steve Birenberg of Northlake Capital Management. "The Street is not expecting that, and it would show a clear break with his father in a relatively simple way that would be well received by investors."

Birenberg also suggests one of James' and Lachlan's first moves could be either to buy the rest of BSkyB or sell Fox's 39 percent stake in the British broadcaster, an issue that has recently been widely discussed in the U.K.

Creutz only has a "market perform" rating on Fox's stock, in part because the Murdoch family — perhaps more than ever before — wields so much control. But Nomura analyst Anthony DiClemente has a "buy" rating on the stock. He cites the company's high-margin retransmission consent fees, peer-leading exposure to high-growth international markets and financial flexibility gained through the sale of European pay TV assets Sky Deutschland and Sky Italia.

James, who is set to speak at the Cannes Lions festival June 25 in his first major public act since being tapped for the CEO role, also may have to pay attention to a new high-profile stockholder: billionaire Warren Buffett, who began accumulating Fox shares in late 2014 and now has 6.2 million of them.

At the midyear point, analysts say they are looking for signs that Fox — like Viacom — can improve its ratings trends. That could be a key factor in whether the stock will end 2015 higher or lower.