Softer Advertising Marketplace Likely To Weigh Over Fox’s Broadcasting Operations

21st Century Fox (NASDAQ:FOX) has been successful with its cable networks such as Fox Sports and Fox News, which contribute around 70% to the company’s value, according to our estimates. This can be attributed to high profit margins of over 35% that Fox enjoys on its cable networks and Fox News’ dominance among the U.S. cable news networks. On the other hand, the broadcasting business has been a low value contributor for the media giant, primarily due to lower margins of around 18%. The broadcasting business contributes close to 16% to the company’s overall revenues, but the contribution towards profits is lower (12% in 2014), reflecting lower margins in this business. Broadcasting networks such as Fox rely heavily on advertising income. The broadcasting advertising trends are uneven, as they are driven by various events such as political campaigns and sports. Looking at 2014 U.S. advertisement spending, it grew only 4%, lower than anticipated, and it is likely to remain soft in 2015, according to Magna Global. ^[1] However, media companies are now trying to lower the split between advertising and non-advertising income. As the non-advertising income grows at a faster pace than advertising income, the content providers can look forward for stable growth outlook in the long run.

We estimate revenues of about $30 billion for 21st Century Fox in 2015, with EPS of $1.69, which is in line with the market consensus of $1.70, compiled by Thomson Reuters. We currently have a $39 price estimate for 21st Century Fox, which is more than 15% ahead of the current market price.

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Unfavorable Trends In Advertising Marketplace

The U.S. advertising market trended weak in 2014, despite the improvement in the U.S. macro-economic environment. Television advertising revenues grew 4.8% for the year, much lower than Magna Global’s spring estimates of 8.6%. While the cable networks advertising revenues grew by 3% in 2014, the broadcast television declined by 4% (excluding Olympics). This dismal performance can be attributed to the competition from digital media formats, which saw a 28% growth in video and 65% jump in social media ad revenues. ^[1]

Magna Global expects a softer 2015 for overall U.S. advertising market and a 1.4% decline in television advertising. Looking at Fox Broadcasting and MyNetwork TV revenues, we don’t expect much of change from the current levels of $5.30 billion, both in the near term as well as in long run, as lower volumes will offset higher ad pricing. We estimate the overall broadcasting revenues will be around $5.70 billion by the end of our forecast period and an estimated EBITDA margin of 18% will translate into EBITDA of around $1 billion, representing less than 9% of the company-wide EBITDA. However, it must be noted that any meaningful change in the broadcasting revenues wouldn’t have much of impact on our price estimate due to the low value contribution of this business to Fox’s overall price estimate.

Except Empire, Most of Fox’s Scripted Shows Are Seeing Ratings Pressure This Season

Advertising income is largely dependent on television ratings, which have been declining for most of the broadcasting as well as cable networks in the recent past. This can be attributed to a shift in viewing habits, which has led to a growth in digital platforms. Unfortunately, Nielsen as of now takes into account only the traditional television ratings in its calculations and the media houses are furious about that and rightly so. If there were a better mechanism to know the viewership trends on digital platforms, they could accordingly negotiate the licensing revenues, which may help them offset the declines in advertising income on the traditional television.

Looking at Fox’s ratings, most of its scripted shows are down in current television season ratings. Sleepy Hollow and New Girl ratings are down more than 30% in the key 18-49 demographics. ^[2] The only scripted show that has been successful for Fox this season is Empire, which has surged 47% in the key demographics since its premiere. ^[3] The network’s non-scripted shows such as American Idol and Masterchef Junior have also seen ratings growth in the current season. Into 26th week of 2014-15 broadcast television season, Fox currently stands at the fourth spot with 6.16 million total viewers. This compares with CBS’ 11.55 million and NBC’s 9.26 million viewers. ^[4] Given the trends in the advertising marketplace, it appears that the upfront ad sales that will kick in June, may continue to see lower volumes as was the case last year,  Accordingly, more money is likely to shift from television to digital media.

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1. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 [↩] [↩]
2. FOX 2014-15 Season Ratings, TVSeriesFinale, Mar 17, 2015 [↩]
3. TV ratings: ‘Empire’ continues viewership growth, dips in key demo, Los Angles Times, Mar 12, 2015 [↩]
4. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 25 Ending March 15, 2015, Zap2it, Mar 17, 2015 [↩]