Investment View: Sky has potential to rebound, but ITV may struggle
Virgin is getting better... and is beginning to present a genuine competitive threat after years of problems
The future for British Sky Broadcasting is unusually cloudy at the moment, and it is all thanks to the company's biggest shareholder and the continuing travails of the man who has dominated it for so long: Rupert Murdoch.
Quite how the continuing turmoil over phone-hacking will affect the satellite broadcaster is anyone's guess. There is a school of thought in the City that when the dust has settled Mr Murdoch – or perhaps his successor – will return with a new bid to take full control of what is, in pure business terms, a money-making machine.
That might prove to be a tad optimistic because there is another view that suggests a quite different outcome, one involving regulators who could yet force changes to the way Sky does business, and perhaps even to its ownership.
Sky is a unique company. It controls a platform, generates content and buys content in. Some of it (Sky Atlantic, for example) is not available to competitor platforms and is therefore used as a lure to take subscribers away from them.
And don't those subscribers spend! There are many households who budget more for Sky than they do for food. The consumer slowdown may not hit Sky as hard as some because it is seen not so much as a luxury but as an essential. People will go without other things to keep it in their homes.
That said, subscriber growth has been slowing. But Sky has responded by focusing on selling those subscribers more product, and its broadband and telephone package is proving a success.
The company should be careful – its customer care is weaker than its formidable sales operation: Sky can make moving house a nightmare, for example. Fortunately (at least for Sky) not many people are moving right now and it operates in a sector where rivals have proved none too strong on that score themselves. Virgin is getting better, though, and is beginning to present a genuine competitive threat after years of problems.
New technology and the growth of new platforms could also serve to crimp Sky's revenue-generating machine, although they could also work to its benefit.
It remains impossible to predict how the turmoil in the Murdoch empire will end, but what of Sky's financials? They look to be in rude health. At interim,s the company grew earnings per share and its dividend by 20 and 5 per cent, respectively. It is in the midst of a substantial share buy-back too.
That said, despite Sky's attractions at just over 14 times forecast full-year earnings, yielding a prospective 3.5 per cent, the shares look no better than fairly valued given the considerable uncertainties. But I'd still hold.
Compared with Sky, ITV is a Cinderella. The company is over-reliant on fickle advertising revenue and lacks a pay platform. Adam Crozier wants to address this through a five-year "transformation plan" which also seeks to strengthen ITV Studios.
This is not such a bad idea. HBO in the US has proven that quality drama is something people will pay for. Denmark's smallish public sector broadcaster has produced a string of hits that have spread far beyond its limited confines, including attracting a very respectable audience in subtitle-phobic Britain. In other words, you don't need an HBO-sized budget.
One has to wonder, however, whether ITV can pull this off, or even something more downmarket.
I'd advise caution. The mid-November trading update offered some grounds for optimism: net advertising revenue was 2 per cent higher and TV production revenues were up 9 per cent over the first nine months.
The valuation, at under 11 times full-year earnings with a 3 per cent prospective yield, is relatively undemanding. However, I remain sceptical. Avoid.
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