Entertainment company Fox fell -8.1% to $26.80 per share after Rupert Murdoch announced that he was considering to merge it with New Corp. FOX is -47.96% below its average analyst target price of $51.5, which implies there is more upside for the stock. Over the last year, Fox has underperfomed the S&P 500 by -5.3%, moving -25.4%.
Fox's trailing 12 month P/E ratio is 12.8, based on its trailing Eps of $2.09. The company has a forward P/E ratio of 11.4 according to its forward Eps of $2.35 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US communication services companies is 18.65, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand FOX’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Fox’s PEG is 2.72, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Fox's gross profit margin trends:
- 2021 gross margins: 34.8 %
- 2020 gross margins: 37.7 %
- 2019 gross margins: 36.5 %
- 2018 gross margins: 35.7 %
- Average gross margin: 36.2 %
- Average gross margin growth rate: -0.7 %
- Coefficient of variability (lower numbers indicating more stability): 3.5 %
While not the strongest, Fox's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Fox was $1,577,000,000.00 as of its last annual report.
Over the last 4 years, the company's average free cash flow has been $2,006,750,000.00 and they've been growing at an average rate of -10.6%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FOX have received an annualized dividend yield of 1.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Fox's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.3, but is still below the average P/B ratio of the Communication Services sector, which stood at 2.62 as of the third quarter of 2022.
Fox is likely undervalued at today's prices because it has a very low P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with a downwards trend. The stock has mixed growth indicators because of its consistently average gross margins that are stable, and an above average PEG ratio. We hope this preliminary analysis will encourage you to do your own research into FOX's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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