21st Century Fox Will Benefit From The Success Of X-Men And Rio 2 In June Quarter; Sequels To Drive Business

21st Century Fox (NASDAQ:FOX) has come up with handful of hit titles in 2014, including X-Men: Days of Future Past, Rio 2 and Mr. Peabody & Sherman. These movies have performed well and so far this year and the studio has managed to gross over $1.6 billion at the global box office. ^[1] In the U.S. alone, the studio has grossed over $600 million, commanding a market share of 14.2%. ^[2] While it will be interesting to see how the studio performs for the rest of the year, the company will see benefits of X-Men: Days of Future Past and Rio 2 in the June quarter. It must be noted that Rio 2 was made with a production budget of $103 million and has so far grossed more than $460 million at the global box office. ^[3] Similarly, the production budget for X-Men: Days of Future Past was $200 million, and the movie has already grossed $609 million at the global box office in less than a month. ^[4] We believe that the studio will continue to do well in the near term, as well as in the long run, driven by the increased production and sequels of some of the popular titles, including Avatar and X-Men. EBITDA margins at the company’s studio business had been close to 20%. However, they declined in 2013 to 13%, reflecting higher costs associated with some of its titles. Success of individual movies is unpredictable. The revenues and profits can vary within a very wide range depending upon the degree of success. Keeping this risk in mind, we forecast only limited growth in margins.

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How Is 21st Century Fox’s Movie Business Trending?

21st Century Fox’s studio produces and distributes movies worldwide. These movies are distributed worldwide to theaters, licensed to TV networks and sold to customers in form of DVDs and electronic versions. Additionally, the movies are licensed to 21st Century Fox’s broadcasting and cable networks as well as networks owned by other media companies. Overall, the studio business contributes more than 15% to 21st Century Fox’s value, according to our estimates.

Continued Growth At The Box Office

The studio derives revenues from three sources:  the box office, DVD and electronic sales, and content licensing. Its box office revenues have grown at an average annual rate of 12% over the last five years, amounting to $1.89 billion in 2013. ^[5] During this period, the studio released many successful titles such as Avatar, X-Men series and Ice Age series. We expect the strong performance to continue and estimate that 21st Century Fox’s annual box office revenues will reach close to $2.5 billion by the end of our forecast period in 2020. This growth will be driven by some of the popular titles including sequels to Avatar, X-Men, and Independence Day. While it is difficult to forecast a movie’s performance at the box office, the trend suggests that popular sequels turn out to be profitable for the media companies. For 21st Century Fox, Avatar was a blockbuster hit with global box-office collection of over $2.7 billion, making it the highest grossing movie of all time. The sequel of Avatar (rumored in 2016) is much awaited and it is safe to assume it will generate big bucks for the studio.

Movie, TV DVDs And Electronic Sales To Decline But Licensing Will Continue To Grow Strongly

21st Century Fox’s DVD and electronic sales grew at an average annual rate of a little under 3% over the past five years. Revenues have gone up from from $2.47 billion in 2009 to $2.82 billion in 2013. However, we expect the figure to decline slightly in the coming years. The availability of content online and the rise of alternative video platforms such as Netflix (NASDAQ:NFLX) have led to a decline in DVD sales. It is unlikely that the company will be able to offset this loss with electronic sales.

On the other hand, content licensing business has been growing strongly for the company. Content licensing refers to revenues earned by 21st Century Fox through licensing of its movie and TV content to cable and broadcasting networks in the U.S. and international markets. This business has grown at an average annual rate of close to 13.5% over the last five years, amounting to $4.27 billion in 2013. ^[5] We expect this uptrend to continue in the coming years and estimate revenues to be northward of $6 billion by the end of our forecast period. The growth in licensing will be driven by increased production of shows and movies, and expansion in international markets. However, the company will need to focus on bringing unique and original content, which has been one of the major drivers behind its rival CBS’ (NYSE:CBS) success in recent years.

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1. 2014 Worldwide Grosses, Box Office Mojo, As of June 9, 2014 [↩]
2. Studio Market Share, Box Office Mojo, As of June 9, 2014 [↩]
3. Rio 2, Box Office Mojo, As of June 8, 2014 [↩]
4. X-Men: Days of Future Past, Box Office Mojo, As of June 8, 2014 [↩]
5. 21st Century Fox’s SEC Filings [↩] [↩]