Licensing Fees And Sequels Will Drive Fox’s Studio Operations In The Coming Years
21st Century Fox (NASDAQ:FOX) has come up with a handful of hit titles in 2015, including Kingsman: The Secret Service, Home and Taken 3. These movies have performed well so far this year, and the studio has managed to gross over $1 billion at the global box office. In the U.S. alone, the studio has grossed over $500 million, commanding a market share of 12.6%. [1] Taken 3 was made with a production budget of $48 million and has so far grossed more than $325 million at the global box office. [2] Similarly, the production budget for Kingsman: The Secret Service was $81 million, and the movie has already grossed $403 million globally. [3] We believe that the studio will continue to do well in the long run, driven by the increased production and sequels of some of the popular titles, including Independence Day and X-Men. EBITDA margins at the company’s studio business are relatively lower at around 16%, reflecting higher costs associated with some of its titles. Success of individual movies is unpredictable and 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.
We estimate revenues of about $30 billion for 21st Century Fox in 2015 with EPS of $1.70, which is in line with the market consensus of $1.71, compiled by Thomson Reuters. We currently have an $39 price estimate for 21st Century Fox, which is around 15% ahead of the current market price of $34 per share.
Understand How a Company’s Products Impact its Stock Price at Trefis
- Fox Stock Rallied 6% Last Week – What Should You Know?
- Fox Beats Q4 Estimates On The Back Of Gains In Cable Networks, Studio Performance
- U.S. Department of Justice Approves Disney-Fox Deal
- What Would A Potential Comcast-Fox Combination Look Like?
- How Much Could Comcast Benefit From Acquiring Fox’s Studio Business?
- Why We Revised Our Price Estimate For Fox To $43
How Is Fox’s Studio Business Trending?
Fox’s studio produces and distributes movies worldwide to theaters, licensed to TV networks and sold to customers in the form of DVDs and electronic versions. Additionally, the movies are licensed to Fox’s broadcasting and cable networks as well as to networks owned by other media companies. Overall, the studio business contributes around 25% to the company’s value, according to our estimates.
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 9% over the last five years, amounting to $2.12 billion in 2014. [4] During this period, the studio released many successful titles such as Avatar, the X-Men series and the Ice Age series. We expect the strong performance to continue and estimate that Fox’s annual box office revenues will reach close to $2.75 billion by the end of our forecast period. 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 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 studio plans to bring 3 more sequels to the movie and Avatar 2 is expected to release in December 2017. It is much awaited and it is safe to assume it will generate big bucks for the studio. Similarly, the studio will continue to make sequels to some of its other popular titles, such as X-Men, Independence Day, Kung Fu Panda and Ice Age. However, it must be noted that there is stiff competition in the industry with media companies such as Disney (NYSE:DIS) and Time Warner (NYSE:TWX) also coming up many popular titles such as the Star Wars series, the Batman series and Frozen 2 to name a few. Accordingly, we expect Fox to maintain around 10% global box-office market share, and this will translate into annual box-office revenues of $2.80 billion by the end of our forecast period.
Expect Strong Growth In Licensing Revenues
Fox’s DVD and electronic sales grew at an average annual rate of over 5% in the past five years, amounting to $3.24 billion in 2014. However, we don’t expect any significant growth in the coming years as the availability of content online and the rise of alternative video platforms such as Netflix (NASDAQ:NFLX) have led to lower DVD sales. It is unlikely that the company will be able to offset this decline with growth in electronic sales.
On the other hand, content licensing business has been growing strongly for the company. Content licensing refers to revenues earned by 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 13% over the last five years, amounting to $4.91 billion in 2014. We expect this uptrend to continue in the coming years and estimate revenues to be northward of $8 billion by the end of our forecast period. Growth in licensing will be driven by increased production of shows and movies, and expansion in international markets. This will translate into overall studio revenues of over $14 billion by the end of our forecast period. An estimated EBITDA margin of 20% will translate into EBITDA of over $2.80 billion, representing close to 25% of the company-wide EBITDA.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Studio Market Share, Box Office Mojo [↩]
- Taken 3, Box Office Mojo [↩]
- Kingsman: The Secret Service, Box Office Mojo [↩]
- 21st Century Fox’s SEC Filings [↩]