Fox News Sees Ratings Growth In Q3; Subscription To Drive Growth In The Coming Years

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21st Century Fox‘s (NASDAQ:FOX) Fox News Channel ended the third quarter as most watched basic cable network in primetime. It was up 2% in viewership and 4% in 25-54 demographic. In primetime it was up 11% as compared to the prior year quarter. The network averaged 2.11 million viewers in primetime between June 30 and September 26. Fox News’ performance was much better than its peers, including CNN and MSNBC. While CNN grew only 3% in primetime, MSNBC was down 21% for the quarter. [1] Higher ratings translate into better advertising revenues for cable networks such as Fox News. The network generates revenues from both advertising slots sold to advertisers, as well as subscription fees collected from pay-TV service providers. An uptrend in ratings will boost Fox’s advertising income, which accounted for 25% of the company’s overall revenues for fiscal year 2014 (Fiscal years ends with June). [2]

We estimate revenues of about $34 billion for 21st Century Fox in 2014, with EPS of $1.59, which is in line with the market consensus of $1.45-$1.64, compiled by Thomson Reuters.  We currently have a $39 price estimate for 21st Century Fox, which is about 25% ahead of the current market price.

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How Is Fox News’ Viewership Trending?

The cable news networks saw a decline in primetime viewership last year. The combined median primetime viewership of the three major news networks – Fox News, CNN and MSNBC – dropped 11% to about 3 million, the smallest it has been since 2007. [3] The chart complied by Pew Research Center shows the cable news median primetime viewership from 2004 to 2013. It was a tough comparison with 2012, which was the election year in the U.S. However, 2014 has been mixed so far. During the first quarter, the network saw 4% growth in total viewers in primetime while the same declined by 16% in the second quarter. [4] [5] In the third quarter, it was again up 11%. [1] We are eager to learn how the viewership trends in the coming quarter given the midterm elections.

Subscription Revenue Growth Likely To Continue In The Coming Years

Fox News Subscription contributes more than 5% to 21st Century Fox’s value, according to our estimates. The network has high penetration of over 94% of the U.S. pay-TV households market and it charges an estimated $0.82 monthly subscriber fees from the pay-TV operators, translating into subscription revenues of close to $1 billion in 2013. Subscription fees have been on an uptrend, growing from $0.32 in 2007 to an estimated $0.82 in 2014. We estimate the growth to continue in the coming years and subscription fee to be north of $1.25 by the end of our forecast period, translating into revenues of around $1.5 billion by end of the decade. An estimated EBITDA margin of 38% will translate into EBITDA of around $600 million.

Subscription fee growth will be driven by the appeal of Fox News’ programming and the multi-year agreements with the distributors. Fox News has been the top cable news channel for several years. It features immensely popular shows such as The O’Reilly Factor and The Kelly File. Moreover, contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. These contracts are long-term, spanning across several years.

How Is Advertising Marketplace Trending?

The U.S. advertising market trended well in 2013, despite the absence of the Olympics or high political spending. While the overall U.S. advertising revenues grew by 1.3% in 2013, the cable TV grew by 4.4%. [6] Television as a medium continues to lead with more than 57% share of the overall advertising market. We expect a slight uptick in 2014 advertisement spending primarily due to the U.S. midterm elections. According to a research by eMarketer, the 2014 TV ad market will grow 3.3% to $68.54 billion and to $78.64 billion by 2018. [7] The overall growth in the advertising market will boost advertising income of ad supported cable networks. The table compiled by eMarketer, shows the television advertisement spending forecast till 2018.

 

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Notes:
  1. Q3 2014 Ratings: Fox News Notches Historic Primetime Victory over USA and ESPN, Media ITE, Sep 30, 2014 [] []
  2. 21st Century Fox’s SEC Filings []
  3. Key Indicators in Media & News, Pew Research, Mar 26, 2014 []
  4. Q1 2014 Cable News Ratings: CNN Remains in 3rd Despite March Surge, Media ITE, Apr 1, 2014 []
  5. Q2 2014 Cable News Ratings: Fox News Hits 50th Straight Quarter at #1, Media ITE, Jul 1, 2015 []
  6. MAGNA GLOBAL Advertising Forecasts: 2014, Magna Global, Dec 9, 2013 []
  7. Total US Ad Spending to See Largest Increase Since 2004, eMarketer, Jul 14, 2014 []