Why You Should Never Invest in 21st Century Fox (FOXA)

Advertisement

One of the earliest lessons I learned during my sojourn in Hollywood was that “the money is in distribution, not in content.” That piece of advice came from a movie executive, whose point was this: Making movies is absolutely loaded with risk.

foxa-stockThere is simply no way to predict how a movie will perform at the box office. And though certain projections can be made, the risk of losing a substantial amount of a studio’s investment is quite large.

That risk can be mitigated by portfolio theory: Produce lots and lots of movies, and it only takes a blockbuster or two to push the studio into profit by making up for all the movies that lose money.

Distribution, on the other hand, carries little risk. Distributors of films are paid distribution fees and often took a 50/50 cut of box office receipts as well, which is why the producer’s cut was always less than 50%. These days, most film studios will both produce and distribute their own content, and perhaps distribute some independent films, which cuts the risk factor.

The same essentially applies to television, where the TV arm of a studio will produce its own content and air it on its own network.

Note, however, that this strategy doesn’t remove all the risk. In fact, it’s still very high.

FOXA Stock Has Nothing on Disney

The problem with 21st Century Fox (FOXA), however, is the same problem that I have with DreamWorks Animation (DWA). Both produce and distribute content … and that’s about it. If you are going to invest in entertainment, you should go with a broadly diversified entertainment entity to offset those risks with other business lines. That’s why I own Disney (DIS).

Now, FOXA has something going for it that DreamWorks doesn’t, in that it produces a lot of content besides movies and TV. FOXA also produces sports and news, animation, and it owns broadcast TV stations besides its flagship network.

However, another big problem with investing in Fox stock is that 21st Century Fox’s revenue streams, cash flow and net income are highly irregular. It may have a monster year with Avatar but a relative dud the next year. For example, in 2013, 2014 and 2015, FOXA stock posted revenues of $27.7 billion, $32.9 billion and $29.9 billion, respectively.

EBITDA was all over the place in those same years for 21st Century Fox: $9.8 billion, $6.3 billion and $11.04 billion. Net income for each year was $7.1 billion, $4.5 billion and $8.3 billion.

How do you even value a company like that? Unfortunately, you have to value it the same way I value Liberty Media (LMCA) or IAC/InterActiveCorp (IACI), which is to look at how Operating Income Before Depreciation and Amortization (OIBDA) comes in for FOXA. But then it’s difficult to make direct comparisons between 21st Century Fox and other companies.

It’s one thing for me to put my trust in John Malone or Barry Diller to deliver amazing cash flow. It’s entirely another thing for me to put my faith in the whims of the viewing public who may or may not respond to certain content from FOXA.

Again, that’s why I wouldn’t touch Fox stock. Why do that when I can buy Disney? With DIS stock, I get a huge conglomerate that is vertically integrated, where films can be cross-marketed on its own TV stations, where it is exploiting the heck out of Star Wars, not to mention Pixar and decades of content coming from Marvel Studios?

Buy Disney. Sell FOXA.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long DIS. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/foxa-never-invest-21st-century-fox/.

©2024 InvestorPlace Media, LLC