Buffett, famous for buying stock in companies when the overall market has beaten them down, increased his stake in Rupert Murdoch's Fox during the first quarter while selling shares of Charter Communications (CHTR) and Viacom (VIAB).
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Buying Fox shares is a bet that Murdoch can turn around a company that has struggled for more than a year as the Fox network has suffered a steep ratings decline coupled with a precipitous decline in advertising revenue. But Buffett knows that many stocks are capable of a rebound, and Fox has long been one of the world's best performing media stocks over the past five years. Shares have gained 174% over the past five years. Of course, Fox has taken a bit of a beating in 2015, losing 12%.
Fox is a media company with deep pockets that has promised to invest in new programming to address its flagship network's struggles. Fox is also a company with extensive holdings in Europe, an underperforming market if there ever was one. It's also made huge investments in India, an emerging market that carries few of the state-sanctioned limitations to foreign companies found in China or Russia, and may have better immediate growth prospects than Brazil.
Fox shares, though, are not particularly cheap on price to earnings ratio. The stock is trading at 19 times earnings, which puts it near the top -- 21 times earnings -- within the U.S.-traded media sector.
Yet viewed on the basis of operating free cash flow, which identifies the amount of cash a company generates from current operations while leaving aside its capital expenditures, Fox is more attractive, argued Deutsche Bank media analyst Bryan Kraft in a May 11 investor report. Fox is trading at 11 times free cash flow compared to 18 times for Disney (DIS) and 9 times for Viacom (VIAB), which arguably faces even greater obstacles at its cable-TV channels Nickelodeon and MTV.
The negatives for Fox focus on its broadcast network which has been bleeding viewers and advertising dollars for more than a year. Among younger viewers, Fox's prime-time audience is 21% smaller than a year ago, according to Nielsen. The network's troubles are particularly worrisome given that it has the No. 1 show on television in Empire, and two other shows, Gotham and Last Man on Earth have also been drawing solid ratings. But much of the rest of Fox's schedule is underwhelming.
No wonder then that the quarter ended March 31 generated less net income than for the same period in 2014: $975 million or 46 cents a share compared to $1.05 billion or 47 cents a share.
But clearly, Buffett is looking beyond the current season, and he may even be discounting all the sky-is-falling talk about advertising leaving linear television for digital platforms. On the expectation that Fox can resolve its network programing troubles and reverse declines in advertising sales, the company has a number of strengths, according to Deutsche Bank's Kraft.
Chief among them are affiliate fees, the money pay-TV operators pay Fox to carry its channels. Profit at Fox's cable-TV group rose 4.8% to $1.23 billion as revenue jumped 14% to $3.59 billion. Fox's movie business remains on solid footing. The film studio 20th Century Fox makes "tentpole" films that travel internationally. And Fox Searchlight has emerged as the dominant player in independently produced films. Kingsman: The Secret Service and Taken 3 were credited with driving an 8% increase in profits at Fox's film group.
Fox is also sitting on about $9.3 billion in cash, which Murdoch could use to buy back more shares.
Buffett increased his position in Fox during the first quarter, spending $28.4 million to go along with a much larger purchase of 4.75 million shares for $160 million during the fourth quarter of 2014. It's a bet on Murdoch's ability to turn his company around. It's classic Buffett.