Twenty-First Century Fox Inc (NASDAQ:FOXA, NASDAQ:FOX), a company who has reliably beat estimates in the best, missed consensus expectations in its Q3 earnings report. Things don’t look great for Fox stock.
The New York-based media conglomerate faces uncertainty as a new generation of the Murdoch family gains increasing control of the media empire. Further, the sale of most of its assets has added confusion as a bidding war and the nature of regulatory approvals weigh on Fox stock.
A Rare Miss for Fox Stock
For Q3, the Twenty-First Century Fox earnings per share (EPS) of 49 cents missed estimates by 5 cents. The number also represents a 5-cent per share drop from the same quarter last year.
Revenues of $7.42 billion beat estimates by $10 million. This translates into a 1.9% drop in revenue from the same quarter of last year. Wall Street expressed a muted reaction to the news. The stock saw a modest increase in morning trading.
Fox stock rarely misses earnings. Seeing the company fall short of its numbers reflects poorly on the company’s current condition. Indeed, the company faces considerable uncertainty.
Rupert Murdoch’s son James holds the CEO position while his other son Lachlan serves as an executive chairman.
Uncertainty Plagues Fox
Although Rupert Murdoch “retired” in 2015, the 87-year-old Australian-American media mogul retains his role as the other executive chairman. Hence, he still casts a wide shadow of the company, and presumably a great deal of influence. What this company will look like once Murdoch makes a complete exit remains unknown.
Interestingly, the uncertainty extends to Fox’s plan to spin off most of its media assets. The plan had been to retain the news, business, and sports channels and some real estate holdings and to sell everything else.
Now, potential suitors work to take over its assets, or possibly pick it apart. Walt Disney Co (NYSE:DIS) made a $52.4 billion bid for the majority of Fox’s assets in December.
This comes while Fox bids for the assets of Sky PLC (OTCMKTS:SKYAY) against Comcast Corporation (NASDAQ:CMCSA), who has made a larger offer for Sky’s Assets. Rumors have come to light that Comcast may also attempt a $60 billion bid to acquire Fox’s assets.
Fox investors should also note that regulatory approval for any of these mergers remains far from certain. The Trump Administration has gained a reputation for blocking mergers if they think one company would gain too much control. Under that standard, both bids for Fox face huge challenges on this front.
Mergers Are Priced in
Moreover, the stock gained 50% between November and January. FOXA stock has traded in a range since. At a 15 price-to-earnings (PE) ratio, Fox stock trades near its 5-year average valuation. However, the company has struggled to grow its revenues. Profit levels have also fluctuated during this period.
Also, since nobody knows what the company will look like in the near term, profits have become difficult to forecast.
This gain along with the merger situation puts both prospective buyers and current owners in a quandary. Assuming a merger goes through, Wall Street has priced merger premiums into the stock. If neither potential merger goes through, FOXA stock will suffer a massive loss in value. Given this reality, seeing a path to gains in Fox stock becomes difficult.
The Bottom Line on Fox Stock
A generational transition, as well as the inability to predict the outcome of asset sales, bodes poorly for FOXA stock following its earnings miss. In a rare miss, Twenty-First Century Fox earnings fell short of analyst estimates. This has become one of many surprises as Fox transitions to the next generation of Murdochs.
The anxiety is further compounded by the bidding war for much of its media assets as well as doubts a sale can gain the approval of regulators. FOXA stock also saw a large gain in the stock price in recent months.
All of these factors leave little room for the stock to move higher. Until investors can know who Twenty-First Century is and how it can grow, they should avoid this stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.