NEW YORK — Fox Entertainment stock got a jolt out of its fall ratings-induced stupor, adding 4% to its value over the last two days thanks to Wall Street upgrades on the stock and anticipation of an “American Idol 3”-fueled primetime recovery next week.
Merrill Lynch Tuesday raised its call on Fox stock from “sell” to “neutral” based largely on Fox’s strong strategic positioning. Prudential Financial followed suit Wednesday, raising its target price and rating on Fox from “neutral” to “overweight,” the equivalent of “buy” at many research shops. Prudential cited an expected network ratings turnaround, ad recovery at the stations group and the conclusion of the Hughes acquisition as reasons for its bullishness.
Fox shares lost 17% of their value when the Hughes/DirecTV deal was first announced last spring, but since then, the concerns about stock dilution and balance-sheet pressures have dissipated as investors refocused on the healthy increase in value (some $1.35 billion) Fox gets from owning a stake in the satcaster.
Last year, the return of “American Idol 2” transformed Fox’s primetime finances, aided by the first “Joe Millionaire.” Prudential analysts believe “Idol 3” will be more lucrative than last year’s edition, noting that most of this year’s ad inventory was sold in the upfront based on the strong ratings performance for “Idol 2.” Sources speculate Fox could double the price of 30-second spots in the talent contest to more than $400,000.
Company’s shares have languished in recent months as the market got the jitters about the network’s dismal fall performance, which saw non-sports ratings down nearly 12% over the previous year’s period. Fox shares were down 13% since the start of the fall season, compared with an overall 9% jump in the S&P 500.
Analyst John Tinker of Blaylock & Partners is also confident Fox ratings have bottomed out, and is looking for improvement in the latter half of the season. He nevertheless says the company’s full-year fiscal 2004 operating cash flows could take a $60 million-$80 million hit with the cost of overhauling a chunk of its primetime lineup. Most Wall Street analysts are predicting Fox will report fairly flat earnings for the company’s fiscal ’04 second quarter when it reports next month.
Longer term, and factoring an economic and advertising recovery, Prudential is looking for a 29% upside potential in Fox shares (target price of $37 per share) over the next year and a half, which would make it one of the fastest growers in terms of investment returns among the large-cap media congloms. Some 48% of Fox revenue is derived from advertising.
Fox stock gained $1.02, or 3.55%, Wednesday to close at $29.75.