Fox Is a Favorite Media Pick

Neil Macker: The recent pullback in media stocks has created a buying opportunity for investors. One of our favorite ideas in the space is wide-moat Twenty-First Century Fox, whose shares are currently trading in 4-star territory. While Fox recently reported a slightly underwhelming fiscal third quarter, we think the firm has some longer-term trends in its favor.

During the recent quarterly call, management at Fox announced that the firm did not see an acceleration in the loss of domestic subscribers at its larger channels, which were down 1.5% versus same period last year. Overall, Fox actually grew subscribers by a half percent in the quarter. While we don't expect this growth to continue, we note the that Fox's channels are available on every OTT pay TV package, including the two newest entrants, YouTube Live and Hulu with Live TV. We project that Fox, along with its larger peers, will gain carriage in most-to-all new OTT pay TV packages, which have largely been skinny versions of the bundles offered by traditional distributors.

Fox also offers investors greater exposure to international pay television than its wide-moat peers, Disney and Time Warner. Fox has a large international cable channel segment with over 300 channels reaching 1.4 billion households. This exposure can lead to risk tied to foreign exchange but does provide growth opportunities particularly in emerging markets where penetration is below 50%. While penetration in these countries may never approach the 90% peak level of the U.S., we believe that it will continue to expand over the near future, leading to both ad and affiliate fee growth.