Fox Sees Political Ad Surge, But Growth Concerns Prompt Analyst Downgrade

Author: Anusuya Lahiri | September 09, 2024 01:54pm

Seaport Research analyst David Joyce downgraded the rating on Fox Corp (NASDAQ:FOX) (NASDAQ:FOXA) to Neutral from Buy. The typical September seasonality in the market led to the downgrade.

The analyst observed the political and TV station landscape to derive where the most significant amount of political ad spending may take place, driven by races likely to be competitive, from Presidential swing states to Senate, House, and Gubernatorial races.

With Fox Corp’s business model focused on the U.S. and with a primarily traditional media footprint that is most impacted by political ad spending, from its Fox News Channel to its local TV stations that cover 39% of the country, Joyce stacked up Fox’s exposure to that of other public and private key TV station owners.

While that sets up a healthy cyclical cash flow backdrop, the analyst acknowledged that Fox Corp shares have now exceeded his prior price target of $40 for roughly a week, which might already be reflecting the political ad spend enthusiasm. As such, he moved his recommendation to the sidelines, downgrading his rating.

The stock currently reflects a fiscal 2025 levered free cash flow yield of 10.0% or 11.8% unlevered, which is relatively attractive but a 7.0x EV/EBITDA multiple for a company with ~1% net growth on a compound basis through 2027 due to the cyclical nature of political and SuperBowl advertising in their respective years facing the subsequent year’s growth challenges, Joyce noted.

The analyst continues to like the consistent capital returns through stock buybacks and dividends but remains skeptical over the type of tuck-in or complementary acquisition activity on the horizon, given Fox has the industry’s strongest balance sheet at ~0.8x net leverage.

Price Action: FOX stock is up 0.11% at $37.40 at the last check on Monday.

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