The new television season is only two weeks old, but it's already shaping up to be a very bad year for Fox (FOX) - Get Report.

CBS

,

ABC

and

NBC

each have at least one decent hit already. But two of Fox's most highly anticipated new shows have already flopped, and its schedule has big problems almost every night of the week. If the bad news keeps up, Fox could be running

When Chinese Soldiers Attack

by New Year's Day.

Meanwhile, Fox's movie studio is having a lousy year. While the company distributed the

Star Wars

prequel for

George Lucas

in May, the studio essentially sat out the rest of the summer, fearing that

Star Wars

would wipe out its offerings. That decision turned out to be a major mistake, leaving the unit of

News Corp.

(NWS) - Get Report

with only a token share of what turned out to be Hollywood's highest-grossing summer ever.

Unfortunately, at least for those who would love to see Fox czar

Rupert Murdoch

reduced to poverty in his sunset years, what's true for Fox the network and studio may not be true for Fox the company. In fact, with Fox stock down almost 20% since mid-September, sell-side analysts like Raymond Katz of

Bear Stearns

have gone ballistic in their enthusiasm for the company.

"We couldn't disagree with the market more on valuation, and believe the stock is not only undervalued, but deserves to be closer to 36

our target price than 23," Katz wrote in a Sept. 22 note. Influential

Merrill Lynch

analyst Jessica Reif seconded that opinion last week, as Fox presented at Merrill's media conference in Los Angeles. "We believe this company has the potential to beat our estimates and reiterate our price target of 35 for Fox," Reif wrote. The stock dropped 5/16 Tuesday to close at 20 3/4. (Both Bear and Merrill underwrote

Fox's

1998 equity offering. Fox parent News Corp. also owns a small piece of

TheStreet.com Inc.

(TSCM)

, the publisher of this Web site, and "TheStreet.com" TV show appears on

Fox News Channel

.)

The analysts don't argue with the point that Fox has gotten off to a slow start in this year's

Nielsen

ratings, but they note that Fox hasn't premiered most of its new shows, while the other networks have. In addition, they argue that investors who focus too closely on the network and studio ignore Fox's hidden strengths: its television production business and the local television stations it owns nationwide.

Stars May Be at the Studio...
Studio operations generate the bulk of Fox's fiscal 1999 revenue

All figures in millions of dollars for fiscal 1999.
Source: Company filings; Salomon Smith Barney, Morgan Stanley Dean Witter estimates.

Serious long-term investors can be excused for refusing to get too enthusiastic about a media company whose two most visible assets and biggest revenue generators are both sucking wind. But in the topsy-turvy world of media and entertainment, where any company that trades at less than 70 times earnings is considered a value stock, medium-term traders might want to consider what the analysts have to say. (Fox trades at about 65 times its trailing earnings of 33 cents per share.)

For if the recent history of media stocks demonstrates anything, it's that an entertainment company doesn't need to be clicking on all cylinders to get its stock moving. Take

Seagram

(VO) - Get Report

, for example. Canada's best music company ran from 25 in October 1998 to 65 in April despite horrid results from its movie studio and problems in its liquor business. Or CBS

(CBS) - Get Report

, which rose from 18 last October to 47 in May despite not-great ratings from its network. In each case, investors ignored the weaknesses, focusing on Seagram's purchase of

Polygram

and CBS' stellar radio division.

Viewed by that soft standard, Fox starts to look pretty interesting. The company's biggest strength comes from its locally owned television stations, which are the hidden cash cows of any network. Fox is telling analysts that advertising revenue at its stations rose 15% in the just-ended September quarter, its fiscal first quarter. Billings for the December quarter are up 20% so far.

"0+0 pacings are huge," says

J.P. Morgan

analyst Richard MacDonald, using industry jargon for revenue at the stations Fox owns and operates. "The station group is doing very well." (J.P. Morgan is also a Fox underwriter. All the investment banks mentioned in this story rate Fox shares a buy.)

...but Cash Is at the Station
Local stations account for a preponderance of 1999 cash flow

All figures in millions of dollars for fiscal 1999.
Source: Company filings; Salomon Smith Barney, Morgan Stanley Dean Witter estimates.

How important is the station group to Fox? In fiscal 1999, the company's television division posted cash flow, or earnings before interest, taxes and noncash charges, of $707 million on revenue of $3.5 billion. Essentially all of that income came from the local stations, which had a 50-plus-percent operating margin on revenue of about $1.44 billion, while the Fox network actually lost money despite $1.8 billion in revenue, according to

Salomon Smith Barney

. Meanwhile, the Fox movie studio had operating income of only $400 million on $4.4 billion in revenue last year.

In other words, the 0+0 stations accounted for roughly two-thirds of Fox's cash flow in fiscal 1999. So as long as the stations stay strong, Fox has a huge cushion against problems at its network and studio.

(It may seem counterintuitive that Fox's stations can be strong if its network is weak. But in the short term, billings at local stations are driven by ad demand rather than ratings. And demand for ads in Fox markets like New York, Boston and Dallas has been huge, thanks to strong local economies and an infusion of cash from Internet start-ups.)

Fox has also made a huge investment in television production, signing production deals with lots of top television screenwriters, including David Kelley, who single-handedly writes both

Ally McBeal

and

The Practice

. In the short term, production is a money-loser for Fox, because the fees the networks pay to producers don't cover their production costs. But if the shows are successful for four years, they can be syndicated, or sold for off-network reruns, generating hundreds of millions of dollars. Much of that money will go to the show's creators, writers and actors. Even so, analysts are estimating that Fox could generate $2.5 billion in cash flow and $1.5 billion in bottom-line income from syndication sales over the next several years.

So far, investors haven't focused on those potential profits, or on the strength of Fox's local stations. But if Fox's September earnings come in at better than the consensus estimate of 11 cents per share, something Reif thinks is possible, they may get religion. And that could turn Fox into this winter's Seagram, a company whose stock rises for months on the back of a couple of divisions.

Of course, Seagram has now fallen back from its April high of 65 to about 43. But that's another story.

As originally published this story contained an error. Please see

Corrections and Clarifications.