Analyst Sees Tougher Year for 21st Century Fox

Nathanson expects lower earnings growth as broadcast network struggles
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Wall Street is waiting for 21st Century Fox to update its outlook for fiscal 2016. One analyst who has decided to stop waiting for the company has cut his earnings outlook for Rupert Murdoch's media empire.

Analyst Michael Nathanson of MoffettNathanson Research still rates Fox as a buy, but in a report posted Monday, he says the company's earnings will grow 9% in 2016, down from earlier estimates of 14% growth. Earnings will be $7.05 billion, according to Nathanson, compared to the company's EBITDA guidance of $9 billion. While much of the decline is due to foreign exchange and asset sales, lowered estimates are still not a good sign.

On recent earnings calls, company executive have declined to update their guidance for the 2016 fiscal year. They have also enumerated reasons why achieving the current expectations might be difficult to realize, Nathanson says.

Those reasons include the timing of the company's big movie releases, investment in sports rights in India and programming investment in the Fox broadcast network.

Though the success with hit show Empire might indicate a turning point for the network, Nathanson expects Fox broadcasting's ad revenue to be down 5% in 2016—compared to his previous estimate of down 2.5%. Because of additional marketing costs, he's also cutting his earnings estimate for Fox's Television segment by $25 million to $655 million, which would leave it down 12% from fiscal 2015.

Fox's stock price is now slightly lower than it was almost two years ago when 21st Century Fox held a successful investor day introducing the new company, separated from News Corp.'s troubled publishing assets. During that time, other media companies including Disney and Time Warner have outperformed Fox, as has Netflix. Several more cable network oriented companies have done worse: Scripps Networks Interactive, Viacom and Discovery Communications.

With earnings being revised lower across the industry, investors might need a reason to own media stocks at this time, including Fox.

"For starters, most will want to wait and see if new forecast can be hit which will take time," Nathanson says. "As we have seen with Disney, there is nothing like a powerful content cycle to drive positive revisions. That also takes time."

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