Twenty-First Century Fox Inc (FOXA): Bireme Capital Sees Great Value In ‘Hidden Assets’

Bireme Capital is bullish on Twenty-First Century Fox Inc (NASDAQ:FOXA). In its Q3 investor letter (you can download a copy here), the hedge fund discussed Twenty-First Century Fox and other companies. We have covered Express Scripts and Humana already. In this article, we will take a look at Bireme Capital’s investment thesis on Twenty-First Century Fox.

Here is what Bireme Capital said in the letter:

Twenty-First Century Fox (21CF) is a media conglomerate whose main businesses include: 20th Century Fox Movie and TV Production, FOX Broadcasting, Fox News, Fox Sports (FS1, FS2, and Regional Sports channels such as the YES Network), FX, FXX, SKY TV (European Satellite TV), STAR TV (Indian Satellite TV), National Geographic, and a 30% stake in Hulu.

Over the long term, 21CF has seen substantial growth, as their focus on news and sports has proven prescient. Since 2004, Operating Income has grown from $2B to $6.6B, or a 9.8% annual rate. They consistently garner increasing revenues per subscriber from the cable companies that resell their TV channels, and their current contracts (per company guidance) indicate this ought to continue in the future.

The company also has some substantial assets that are “hidden” from cursory analysis, in the sense that they do not contribute much to current earnings (or even contribute losses). The most valuable is their ownership of a dominant satellite TV provider in India: Star. Star India is the country’s largest provider of pay TV services, reaching 650m people per month. This translates to substantial revenue, and as recently as two weeks ago CEO Lachlan Murdoch commented that they are “very confident” that Star India can do $1B of profit by 2020. At that point the business would be worth $20B if it garners the 20x EBITDA multiple the market currently places on their main competitor, Zee Entertainment. This equates to greater than $10 per FOXA share, a material amount relative to the $26.4 price at the end of the quarter.

We think the value of 21CF’s hidden assets implies that we are paying about 6-8x earnings for the core media business. This is a multiple we are very happy to pay for 21CF’s best-in-class media assets. 21CF is currently our largest position.

Twenty-First Century Fox Inc (NASDAQ:FOXA) is engaged in cable, broadcast, film, pay TV and satellite businesses. The media company’s portfolio of cable and broadcasting networks and properties include: FOX, FX, FXX, FXM, FS1, Fox News Channel, Fox Business Network, FOX Sports, Fox Sports Network, National Geographic, STAR India, 28 local television stations in the United States, and more than 350 international channels; Twentieth Century Fox film studio; television production studios Twentieth Century Fox Television; and a 50% stake in Endemol Shine Group. In addition, the media behemoth holds a 39.1% stake in Sky, Europe’s entertainment company serving 22 million customers across five countries.

FOXA is also a popular stock among the hedge funds we track. There were 44 funds in Insider Monkey’s database with bullish positions in the media and entertainment giant. Among those are ValueAct Capital and Yacktman Asset Management.

For the three months ended September 30, Twenty-First Century Fox reported a quarterly profit from continuing operations of $839 million, or $0.45 per share, versus $827 million, or $0.44 per share, in the same quarter last year. The company posted quarterly revenues of $7.0 billion, up from $6.51 billion in the prior-year quarter.

Shares of Twenty-First Century Fox Inc (NASDAQ:FOXA) are up more than 9% this year. Over the last 12 months, the stock has gained 10.14%.

Meanwhile, our research shows that Twenty-First Century Fox is one of the 10 most conservative companies in America.