Twenty-First Century Fox: Scenario Analysis Of Earnings

| About: Twenty-First Century (FOXA)

Summary

Stock has surged more than 30% in the past six months, outperforming the Nasdaq and its peers.

Scenario analysis suggested that the company will beat the street in next quarter.

Twenty-First Century Fox is undervalued among its peers (forward P/E multiple of 14.7x).

Based on DCF analysis, implied share price is $37, which is a 19% premium to the current price of $31.

Twenty-First Century Fox has an increasing dividend yield and share repurchase program.

Source: Google

A third consecutive quarter of better earnings has helped Twenty-First Century Fox (NASDAQ:FOXA) surge more than 30% in the past six months, outperforming the Nasdaq and its peers.

Now, does this trend continue? In next section, we will analyze the street expectation about earnings growth in the future.

Quarterly Earnings Surprise History

Source: Nasdaq

Twenty-First Century Fox reported better-than-expected earnings for the third straight quarter, primarily due to higher affiliate fee and advertising revenues. However, investors are disappointed with lower theatrical revenues at the Filmed Entertainment division and negative impact from currency fluctuations.

Twenty-First Century Fox has cable network and film business in international markets. Therefore, currency exchange rate fluctuations have an impact on the company's advertising revenues.

Source: Nasdaq

Analysts are expecting Twenty-First Century Fox to post EPS of $1.91 in 2017. That represents a rise of 10.32% from $1.73 in 2016. Over the next five years, the analysts are expecting Twenty-First Century Fox's earnings to grow at an average annual rate of 8.95%.

Scenario Analysis - Beat the Street

Through scenario analysis we will analyze whether the company can beat the street based on fundamentals. If yes, then we will certainly see upside in share price and, if not, then either hold or sell. We will also validate scenario analysis with a relative valuation technique, DCF analysis and street analyst's recommendations.

In the above analysis, I have tweaked the top line to present Bear, Base and Bull scenario in line with street estimates.

Base Case: In base case scenario, we have $7.628 billion revenue with $0.53 EPS. Here, the company will beat the street estimate of $0.48 with 10.5% margin.

Bull Case: In base case scenario, we have $7.805 billion revenue with $0.54 EPS. Here, the company will beat the street estimate of $0.48 with 13.0% margin.

Bear Case: In base case scenario, we have $7.236 billion revenue with $0.50 EPS. Here, the company will beat the street estimate of $0.48 with 4.8% margin.

Conclusion: Based on the scenario analysis, we can conclude that Twenty-First Century Fox will continue the earnings surprise in next quarter and has potential for upside in share price.

Now we will validate scenario analysis conclusion by applying the valuation methodologies:

Valuation Methodologies

Investors should look at valuation methodologies when deciding whether to enter or exit a stock. Valuation is driven by perceived growth, risks and investors' willingness to pay. There are various methods available to assess the valuation of a stock.

1. Forward P/E Multiple

As the above table shows, Twenty-First Century Fox has a forward P/E multiple of 14.7x, which is on the lower side among its peers The Walt Disney Company (NYSE:DIS), Time Warner (NYSE:TWX) and CBS Corp. (NYSE:CBS) have forward P/E ratios of 18.9x ,16.3x and 14.9x respectively. Twenty-First Century Fox is undervalued among its peers.

Forward P/E Multiple valuation analysis has supported scenario analysis conclusion about buying stock.

2. DCF Analysis

We used the DCF analysis over a five-year period, with the following assumptions:

  1. Revenue was projected to be in line with the street's expectations. Currently, analysts expect Twenty-First Century Fox to generate revenue of $28,807 million in fiscal 2017 and $29,995 million in fiscal 2018.
  2. Operating margin was in line with historical levels
  3. The company's fiscal 2017 tax rate was in line with historical levels
  4. D&A, CapEx and changes in working capital were projected to be in line with historical levels.
  5. We used a baseline rate of 9% for WACC and a baseline terminal FCF growth rate of 0.5%

Here's the DCF analysis down to the unlevered FCF:

The company's implied share price is $37, which is a 19% premium to the current price of $31. The most likely implied value is between $34 and $40 per share, based on this analysis.

Market View - Positive

Source: Nasdaq

Of the analysts covering Twenty-First Century Fox, 7 recommended it as a "Strong Buy," 1 recommended it as a "Buy "and 5 recommended it as a "Hold."

My Recommendation - Buy

I will recommend Buy rating for Twenty-First Century Fox based on the following factors:

1. Scenario analysis suggested that the company will beat the street in next quarter

2. Twenty-First Century Fox is undervalued among its peers

3. Its implied share price is $37, which is a 19% premium to its current price of $31

4. Twenty-First Century Fox has an increasing dividend yield and is running a share repurchase program

5. Market view is positive about stock

Investment Risk: Considering that sizable sales come from outside the U.S., investors should be aware that there are many factors that could affect the company's ability to increase sales and earnings in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Entertainment - Diversified, Earnings
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