This Fox Is Now Free to Run

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors in Rupert Murdoch's entertainment empire are finally free of the slow-growth newspaper business. Twenty-First Century Fox (NASDAQ: NWSA) is now comprised of the most valuable parts of Rupert Murdoch's media empire. With its cable, movie and pay-TV assets. Twenty-First Century Fox is now a pure-play entertainment company driven by a visionary CEO. The assets owned by Twenty-First Century Fox include the 20th Century Fox film studio, Fox cable channels, STAR TV, Sky Italia and stakes in BSkyB and Sky Deutschland. Analysts are bullish on the new company with 22 rating the company as a strong buy or buy.

Going to be tough to outsmart this fox

For investors in Murdoch, it's safe to assume that he won't be resting on his laurels. Twenty-First Century Fox is in a great position financially to grow. Last year, revenue was $35.5 billion and net income was $5.9 billion. On the balance sheet there's $9.3 billion in cash and $16.5 billion in debt. Operating cash flow was $3.8 billion.

Looking forward, there are a number of catalysts for growth. The first question on every investor's mind is what the next acquisition will be. Murdoch has been looking to buy 61% of BSkyB for the longest time, but was thwarted when the phone-hacking scandal emerged in the U.K. at News Corp newspapers. Now that Twenty-First Century Fox is free of the newspaper business, there's speculation Murdoch will make another attempt to buy the lucrative U.K. broadcaster.

Later this month, Twenty-First Century Fox will release the latest installment of The Wolverine franchise. Expectations are for returns to be inline with Man of Steel, the latest Superman movie. In television, Fox's New Girl became the breakout hit of the season and will now be available immediately on Netflix. New Girl was just renewed for a third season and further strengthens the partnership between Fox and Netflix.

A major focus for Fox is growing in China. Last year, Fox bought 20% of Bona Film Group, which is developing Chinese movies. Bona also owns 20 movie theaters and is planning to have 40 by the end of next year. Fox is working with Bona to develop Moscow Mission, a movie about a series of train robberies between Moscow and Beijing.

Perhaps the most exciting aspect for investors is next month's launch of Fox Sports 1 to challenge Walt Disney's (NYSE: DIS) ESPN. This new channel will replace Fox's Speed channel and offer live sports programming. This new channel is particularly exciting because ESPN is the most profitable division at Disney. If Fox Sports 1 can mount a successful challenge to ESPN, it will be the next multi-billion dollar channel for profits and revenue at Twenty-First Century Fox.

Tough competition

The entertainment business is extremely competitive. Two of Twenty-First Century Fox's biggest competitors are Viacom (NASDAQ: VIAB) and Disney. Both own cable channels and film studios. Even though both companies have strong properties and capable CEOs, they lack having Murdoch at the helm.

Viacom owns cable channels MTV, VH1, CMT, BET, SPIKE, COMEDY CENTRAL, TV Land, Nickelodeon and many others. In film, Viacom owns Paramount Pictures. Last year, Viacom had $13.0 billion in revenue and $2.1 billion in net income.

Going forward, Viacom is going to benefit from the success of the Brad Pitt hit World War Z. Total box office receipts look to top the $300-million mark and will likely become a new franchise for the company. Paramount Pictures is also producing a new movie based on the Teenage Mutant Ninjas franchise with Michael Bay directing. Viacom can leverage this franchise across all of its platforms including Nickelodeon and its consumer-products business.

The focus at Viacom is continuing to use its cash wisely. Viacom continues to develop original programming for its networks and purchase less content from third parties. Viacom is also using its cash toward share buybacks and will purchase a total of $2.8 billion of its own stock this year.

Disney owns ESPN, ABC, Disney theme parks, Marvel Entertainment, Pixar, The Disney Channel, Disney Cruises and Walt Disney Pictures. Last year, Disney had revenue of $43.8 billion and net income of nearly $6.0 billion. ESPN is the largest segment and contributes 60% of its operating profit.

Going forward, Disney remains a very attractive company. Even though the company's Lone Ranger remake looks like it will result in a loss for the studio, Disney can easily offset the loss since film revenue represents only 14% of its total revenue. However, the company's pipeline will likely increase that percentage. Disney just bought the Star Wars franchise from George Lucas and will be releasing a new Star Wars movie in 2015. That same year will see new movies from the Avengers, Pirates of the Caribbean, and Finding Nemo franchises.

Disney will also benefit from ticket-price increases at its California and Florida theme parks this year. Theme parks are the second-biggest division at Disney and those price increases will flow straight to the bottom line and boost margins.

Foolish assessment

All three entertainment companies have great brands and franchises. However, only 21st Century Fox has Rupert Murdoch. He has been at the forefront of the media landscape for over 50 years. He continues to make bold and aggressive moves to position his company for growth. He now has the opportunity to remake his empire again now that News Corp. has been split. Even thou ESPN dominates live sports programming, Rupert Murdoch has been assembling the pieces necessary to take on the dominant sports network. I like Disney and ESPN, but see potential for Fox Sports 1 to gain a piece of ESPN's business.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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