For investors in Twenty-First Century Fox (ASX: FOX) and News Corp (ASX: NWS) it has been a very rewarding few months. Since the split from one into two companies in mid-June, the share prices of both companies have performed well.
Since June 19 when both companies began trading on a demerged basis, Fox's share price is up 8%, News Corp's shares are up 23%, and the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 10.2%.
The Fox business holds many of the most exciting and higher growth assets from the old combined News Corp business. These assets include cable channels, film and television studios and satellite television operations. On a comparable, operating level basis Fox grew revenues by 3% to US$25 billion over the past financial year to June 2013. At a profit before tax level, earnings shot up 44% to US$4.46 billion from US$3.1 billion in the prior year.
Commsec provides forecast earnings per share of 151.9 cents per share for FY 2014 with EPS rising to 192.5 cps in FY 2015 and 233.2 cps in FY 2016. These forecasts suggest Fox has plenty of growth ahead in the next few years.
With the shares currently trading at $35.70, the implied price-to-earnings multiples looking forward for the next three years are 23.5, 18.5 and 15.3 respectively. Given that earnings growth is forecast to be on average roughly 20% for the next three years, these multiples hardly look demanding. Indeed, compared with a number of other stocks within the media sector such as Carsales.com (ASX: CRZ), Fox looks like a relatively good value.
Foolish takeaway
Buying stocks on higher multiples that require high levels of earnings growth to justify the purchase does add an element of risk for investors. However by focusing on companies with proven business models and strong economic moats such as Fox's, which makes the likelihood that the forecast earnings growth will occur, can minimise this forecast risk.
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Motley Fool contributor Tim McArthur owns shares in Twenty-First Century Fox.
