Everyone knows Foxtel and FoxSports. But how does Twenty-First Century Fox (ASX: FOX) look for the years ahead? Digital media is growing more-and-more through our mobile devices, but as a company what does Twenty-First Century Fox have going for it?
Bull
Breaking up is lucrative to do
The 2013 split-up of News Corporation into two parts – digital media/entertainment and traditional media businesses freed up the fast-growing Twenty-First Century Fox entertainment side from the newspapers and magazines that Rupert Murdoch built his empire upon. Twenty-First Century Fox is moving along with the multi-platform movement, seeing where tomorrow's customers will be coming from and going full speed in that direction. This provides more ways for viewers to watch what they want when they want.
Share buyback
In August 2013 the company announced a 12-month long US$4 billion share buyback. That is equivalent to a buyback of about 4.7% of outstanding shares at the early August share price of $35. The company also announced a 47% annual dividend increase, from US$0.17 to US$0.25 cents a share.
Foxtel and Telstra
Twenty-First Century Fox owns 50% of Foxtel along with Telstra's (ASX: TLS) 50% ownership. The two companies are working on combining Foxtel pay-TV with mobile phone and internet service. These three services are mainstays in a majority of Australians' lives, and they are willing to pay for each of them. Both companies can lock in more subscribers and hopefully keep them due to the "stickiness" of consumers to service providers.
Bear
Growing debt
The company's gross gearing is now up to about 81% from 51% in 2011, and 2013 interest expense was about $1.1 billion. For a company getting over the 60% mark starts to weigh on the balance sheet. If earnings growth is high this can be managed, but with a slowdown the repayments can weaken the bottom line.
Changing subscribers and video on demand
Traditional pay-TV subscribers are trending down, with some customers completely "cutting the cord" and giving up pay-TV altogether. In part due to cost savings and in part due to the change in the way digital content is received, the normal "broadcast" is increasingly giving way to consumers choosing their content. So Twenty-First Century Fox has to roll with those changes to keep subscription levels stable.
Video on demand providers like Netflix (NASDAQ: NFLX) also want to take market share and since their business model can offer a more selective service, viewers who are now getting more of their entertainment through tablet PCs than TVs, are forcing the shift upon Twenty-First Century Fox.
Other competitors in Australia such as Quickflix (ASX: QFX) are giving customers alternatives to regular pay-TV. As a result the business may become more price competitive, with potentially more discounting to attract customers.
Foolish takeaway
The bullish side is stronger because despite the challenges of video on demand and changes in subscriber demand for pay-TV, the company has shown that it can adapt and grow with them. The old adage "give the people what they want" should be the guiding philosophy, and giving it to them on whatever platform they choose is the best way to grow with the times.
The company has set a goal of more than US$9 billion in EBITDA for US fiscal-year 2016. Wall Street analysts have forecast $8.8 billion for the year ending in June 2016. To see how it is hitting its targets, keep track of subscription levels and the success of network programming.
