FOX: Still Not Too Late To Dump It (NASDAQ:FOX)

Back in April of this year, I began my Seeking Alpha coverage of Fox Corporation (NASDAQ:FOX) (FOXA) with a SELL rating based on a court order to pay a massive $787.5 million settlement to Dominion Voting Systems. It was reported to be the largest defamation suit settlement in United States history. Since that article was published, the stock has dropped 10% while the S&P 500 has gained 14%. Considering such severe underperformance, today I’ll take a fresh look at FOX to see if it has fallen far enough to now be in the “buy zone”.

Investment Thesis

According to Statista, FOX was, yet again, far-n-away the leading cable network station for the month of November:

Indeed, just yesterday The Hill reported that FOX was the top-rated cable channel for the 8th straight year and:

On a 24-hour total day basis, the network pulled in a daily average of more than 1.2 million viewers including 150,000 in the advertiser-coveted 25 to 54 age demographic, according to Nielsen Media Research data.

That being the case, investing in FOX should be a no-brainer, right? Not so fast.

Earnings

FOX released its Q1 FY24 earnings report on November 2nd:

As you can see from the graphic, revenue was flat yoy while adjusted EBITDA actually fell 20.4% due to higher operating expenses, which grew $206 million as compared to the year ago quarter. As a result, EBITDA margin contracted to 27% (from 34% last year) as higher sports rights and programming costs appear to be an ongoing headwind.

Note that Cable Network Programming revenue declined by $44 million on a yoy basis. Advertising revenue declined 2% yoy as ad-supported Tubi streaming revenue largely offset reduced political ads.

Q1 net income attributed to FOX shareholders was $407 million ($0.82/share), down a whopping 33% from the $605 million ($1.10/share) earned in Q1 of FY23.

The good news is that FOX spent $250 million on share buybacks and $135 million on dividends and distributions during the quarter. The downside of the buybacks is that, given the downward slope in the stock price, FOX has likely been buying stock back at significantly higher prices than today’s price.

FOX ended the quarter with $3.83 billion in cash & cash equivalents, which was down $1.1 billion on a sequential basis. Long-term debt was $6 billion.

Going Forward

Revenue is likely to continue to be flattish to down throughout FY24. That said, FOX is likely to benefit from some positive catalysts: including the 2024 election, the World Series, and the Super Bowl – which delivered a nice boost to FY23 advertising revenue. But sports rights are not cheap, and FOX is also likely to continue investing to grow its Tubi digital streaming platform.

Lawsuits

The Dominion Voting Systems obviously took a big chunk out of what otherwise could have been a significant boost in shareholder distributions (not to cite the company’s reputation as a “news” network …).

However, from a legal standpoint, FOX is still not out of the woods. Indeed, the Wall Street Journal reported back in April that the pending $2.7 billion Smartmatic lawsuit is very similar to the Dominion case, and may have a similar outcome. Quoting Roy Gutterman, a journalism professor at Syracuse University who also teaches communications law:

The Smartmatic case is very similar in scope, style and argument, and some of the context that was at issue in Dominion overlaps with the content in that case. Smartmatic now has a model, a template, and a formula to follow to resolve their defamation dispute.

Given the precedent set by the Dominion case settlement, and assuming that FOX seemingly cannot afford to have its executives put on the witness stand (likely why it settled the Dominion case even after the trial had already started …), it would seem that it is in FOX’s best interest to – this time – reach a settlement prior to a trial so as not to withstand the cost and public humiliation on the scale of the Dominion debacle. However, that is just my opinion, and investors should note that outside of some technology patent law, I have little-to-no background in these types of legal matters. That said, the WSJ article would seem to uphold my opinion.

Risks

Upside risks for FOX would be a better-than-expected settlement on the Smartmatic lawsuit, say, in the neighborhood of ~$4-500 million. On the other hand, downside risks would be if FOX proceeds to an actual trial and the award comes back significantly higher than the Dominion settlement.

Meantime, FOX faces ongoing challenges from declining cable subscriptions as Americans continue to “cut-the-cord”.

Late Update

The New York Times just reported that a jury in federal court in Washington, D.C. ordered Rudy Giuliani to pay $148 million to election workers Ruby Freeman and Shaye Moss for wrongfully accusing them of having tried to steal votes from Donald J. Trump in Georgia. In my opinion, this significantly strengthens the already strong hand Smartmatic holds with respect to the pending litigation with FOX. That is because FOX appears to have two choices: settle with Smartmatic, or face a jury trial. The Giuliani verdict shows just how unpredictable jury trials can be. I say that because the jury in the elections worker case actually awarded more than the claimants requested (~$47 million).

That being the case, I suppose was a good proceed a week ago when FOX hired Adam Ciongoli as its chief legal and policy officer. Ciongoli will report directly to Lachlan Murdoch. At Campbell Soup (CPB), Ciongoli led the legal department, corporate secretary function, and government relations team. My take is that FOX will need all of Ciongoli’s 30 years of encounter (and then some).

Summary & Conclusion

If it is near the same amount as the Dominion case award, FOX’s relatively strong cash position and its solid business model can absorb another significant settlement to resolve the Smartmatic suit. However, if a settlement is toward the higher end of what is sought by Smartmatic ($2.7 billion), that would be a big blow to shareholders and is likely not priced into the stock.

Meantime, FOX’s recent earnings report signaled a relatively stagnant business. So while there appear to be some bright spots in 2024 (notably the Presidential election and sports), those bright spots do not seem to overcome the overhang of the Smartmatic lawsuit risk and the otherwise lack of growth in total revenue. Given a flattish growth outlook and the legal dark cloud hanging over it, and with a TTM P/E=13.5x and a yield of only 1.86%, FOX still looks quite rich in my opinion. And the stock has not dropped far enough to make the yield attractive.

I reiterate my SELL rating on the basis that there are simply too many alpha-rich investment opportunities to allocate any capital to FOX. Putting your money in Vanguard S&P 500 (VOO) ETF would likely put you way ahead in the coming years. To uphold that statement, I’ll end with a 5-year total returns comparison of FOX versus the broad market averages: the S&P 500 – as represented by the VOO ETF – and the Nasdaq-100 and DJIA, as represented by the QQQ and DIA ETFs, respectively:

As you can see, FOX has been a huge laggard. In my opinion, that trend will quite likely continue over the coming 5 years as well.