Fox Stock Is Quite Risky

In theory, when 21st Century Fox (NASDAQ: FOXA) morphs into Fox Corp. after the $71.3 billion sale of Fox’s entertainment assets to Walt Disney (NYSE: DIS) closes in a month or so, Fox can focus on what it thinks it does best, such as sports. But the high, rising cost of sports-broadcasting deals could lower Fox’s profits, hurting Fox stock in the process.

Anytime you are thinking about investing in a “family” business, including Fox stock, it’s important to remember that the family owners —  in this case the Murdochs — usually think of themselves first. Rupert Murdoch and his clan control Fox through the dual-class ownership system of Fox stock. Activist owners of Fox stock have denounced the ownership structure for years in proxy proposals that haven’t persuaded Murdoch to take any action. 

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The Rising Cost of TV Sports Deals

The other thing for owners of Fox stock to remember is that sports broadcasting is becoming an increasingly expensive “game” for Fox to play.

FOXA signed a seven-year extension with Major League Baseball last year for at least $5 billion, representing a 36% average annual increase over the existing contract. Fox also won the rights to the NFL’s Thursday Night Football broadcasting, reportedly paying more than $3 billion over five years or roughly $600 million a year. Incumbents CBS and NBC paid a combined $900 million for the rights to Thursday Night Football under their earlier, two-year deal.

Fox no doubt will compete for “Monday Night Football” when ESPN’s $15 billion contract expires in 2021. The existing $27 billion deal with FoxA, CBS (NYSE:CBS) and Comcast’s (NASDAQ: CMCSA) NBC for the NFL’s Sunday games expires in 2022. Fox certainly will compete for a piece of that deal as well.Deals between leagues and TV networks usually extend existing contracts and are negotiated well in advance of their expiration, so it wouldn’t surprise me if negotiations between the NFL and the networks are going on now.

Prices for sports-broadcast rights aren’t slowing down anytime soon, thanks to the growth of sports betting, which analysts say will boost TV viewership. Tech companies, including Alphabet’s (NASDAQ: GOOG) YouTube and Amazon (NASDAQ: AMZN), may make a run at NFL broadcasting rights since professional football is by far the country’s most popular professional sport. If the tech companies do bid, the prices of NFL broadcast deals will rise meaningfully.

Spending What It Takes

As the sports-broadcast deals illustrate, Fox Executive Chairman Rupert Murdoch is willing to spend what it takes to get a deal done. That “damn-the-torpedoes” attitude is one of the reasons why Murdoch is so successful. It has also lead the 87-year-old to take some foolish risks, including News Corp.’s 2005 purchase of MySpace for $580 million. Six years later, the company sold the ill-fated website for $35 million.

Murdoch also let his emotions get the better of him in 2007 when News Corp paid $5.7 billion for the Wall Street Journal’s parent company, Dow Jones, which he had long coveted. Two years later, News Corp. wrote down half of the value of the Dow Jones acquisition  (A few years ago, the old News Corp,. was divided into News Corporation (NASDAQ:NWSA), which includes Dow Jones, and 21st Century Fox, which owns the old News Corp’s broadcasting and movie assets). 

To be fair, 21st Century Fox has fans such as analyst Michael Nathanson of MoffetNathanson, who recently noted to clients that Fox’s cable networks such as Fox News “likely will have industry-leading revenue growth” and noted that the profits of the Broadcast division, including its local TV stations, are poised to rise over the next few years.  

But Fox stock has jumped more than 36% over the past 52 weeks, outperforming rivals such as DIS, which rose more than 6%, and CBS, which fell 9% during the same period. Fox stock currently is trading at around the consensus price target of Wall Street analysts. I don’t see any catalyst that will move significantly move Fox stock, given the many uncertainties about the company, which is why I recommend that investors take a pass on FOXA.

As of this writing, Jonathan Berr has a small amount of Comcast stock.

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