Pared-Down Fox Corp Earns a Narrow Moat Rating

Neil Macker: With the Disney deal to buy the entertainment assets of Twenty-First Century Fox now complete, we are launching coverage on the successor firm, Fox Corp, with a narrow moat rating, negative trend, and $42 fair value estimate.

After completing the Disney transaction, the Murdoch family now runs a much smaller media firm, though one that still owns some major brands. The major assets at Fox are the Fox broadcast network, Fox News, and Fox Sports. The new company represents a large bet on the viability of live sports and news, as we project that the cable networks will generate a majority of the operating income for Fox Corp. We believe these bets are well placed given our expectations for the evolution of the television industry, but Fox is now undiversified relative to other media firms.

Fox News has finished as the top-rated cable news network for the last 17 years, which spans two Republican presidential administrations and eight years of Democratic control of the White House. Despite the loss of on-air talent like Megyn Kelly and Bill O'Reilly, the network finished as the number-one-rated cable network across all age groups for both prime time and all-day for the last three years. We expect the network to retain its spot at the top of the cable news pyramid, allowing Fox to increase affiliate fees.

While the Fox broadcast network still retains major sports rights, including the NFL, Fox is now the only one of the four major broadcasters without an affiliated studio. We believe that Fox will be able to source new shows from other studios, including independents like Warner Bros., Lionsgate, and MGM, but we are not as sure as management that Fox will be able to obtain ownership of rights to every new show, given the high level of demand for new shows from traditional and new outlets.