Fox Corp Class A (NASDAQ: FOXA) reported a strong fiscal year 2020 second quarter, and investors have cheered the results by sending its shares higher. However, one analyst reacted to the results in a guarded manner.
The FOXA Analyst
Wells Fargo's Steven Cahall maintained an Underperform rating on the shares of Fox but raised the price target from $32 to $33.
The Fox Corp Thesis
Fox' second-quarter beat was big but cord-cutting and sports costs pose risks to the media company, Cahall said in a note.
The analyst noted that quarterly revenues of $3.78 billion and OIBDA of $261 million were way ahead of his as well as the consensus estimate, helped by strong affiliate revenue and TV ad revenue.
Cord-cutting, according to Cahall, is an omnipresent risk for Fox, as it has the most proportional exposure to U.S. affiliate revenue, at about 50% of consolidated revenue.
The analyst said he is currently maintaining his Cable/TV affiliate revenue growth for the second half relatively unchanged at 3% and 16%, respectively. The company estimates total affiliate revenue growth of about 7% in 2020, he added.
If the NFL rights renewal is concluded, the potential for a big step-up on broadcast packages could create a meaningful overhang for Fox, Cahall said in the note.
"We think the NFL is keen to claw back some retrans fees, and Walt Disney Co's (NYSE: DIS) ABC could create additional competition for Sunday afternoon rights," the analyst wrote in the note.
Along with the accelerated repurchase and a semi-annual dividend, Wells Fargo expects more VC-style tuck-ins, especially around sports betting.
"While FOXA's lower leverage can explain some of its premium to Discovery Communications INC. (NASDAQ: DISCA) and ViacomCBS Inc Class B (NASDAQ: VIAC), we think its greater weighting to cord cutting and NFL costs has been overlooked," the firm concluded.
(NASDAQ: FOXA) Price Action
Shares of Fox Corp were down 4.20% to $37.04 at time of publication Thursday.