Investment View: Sky still a nimble performer but ITV is a worry
Tuesday 25 September 2012
Sky: Hold; Price 738.5p. ITV: Avoid; Price 88.1p
Did anyone really think Ofcom would strip Sky of its broadcasting licence as a result of the phone-hacking scandal that continues to gouge the reputation of Rupert Murdoch, James Murdoch and the family's newspaper publishing arm?
Those who wanted to see the company getting its comeuppance might be gnashing teeth, but from an investment perspective the watchdog's ruling last week is good news.
Sky keeps its licence (albeit under review) because while the regulator sees misdeeds at another part of its controlling shareholder as "relevant" to Sky being "fit and proper", no executives have (yet) been implicated in any criminality.
However, it did voice some sharp criticisms, particularly in relation to James Murdoch, the former Sky chief executive who still sits as a non-executive director. What that means is that the Murdochs, and their organisation, might now exercise a degree of caution in their dealings with Sky.
A hands-off approach would be to their benefit, and the benefit of their fellow investors, because it would let Sky's executives get on with the job of driving the company forward and generating returns for all shareholders. And a Sky that starts to resemble a normal, properly governed company presents an attractive proposition.
The group is a money-generating machine. Its subscribers, who face price rises of about 2.5 per cent, are unlikely to revolt over such a move; there are plenty who spend more on Sky than they do on staples such as food or clothes.
Since I last looked there's also been good news for the company on the movie front. The competition authorities in August decided to leave the market alone, and so Sky is free to deploy its considerable resources in attacking Netflix and Lovefilm.
It's worth noting that the company has, down the years, proved extremely nimble when it comes to seeing off or neutering threats to its revenue streams, and in creating new ones.
I had some scepticism about its latest wheeze – Now TV, which will initially offer movies and is designed to tempt some of the 13 million people who don't subscribe to Sky – when it was announced. Estimates suggest that about half those people might be willing to pay for TV in some form, but why waste money on a new brand when you possess a hugely powerful one already?
However, given the resentment and dislike the Murdochs generate, and the backwash on to Sky, perhaps it's not such a bad idea.
The forthcoming trading statement might disappoint a bit – the free-to-air Olympics will have hit ad revenues and might have hit subscriptions. There remain lingering concerns about the contrast between the way Team GB's athletes conducted themselves compared to Premiership footballers – and football has again been generating unfavourable headlines thanks to the activities of its players and its fans. This could yet impact upon Sky, where the partnership with the Premiership remains a cornerstone of its business.
Still, the shares have been steadily rising since I last said hold in February, when they stood at 689.5p. Trading on about 13 times forecast earnings for the year ending 30 June, with a solid prospective yield of 3.5 per cent and good revenue growth potential, I'd keep holding.
ITV, by contrast, has more difficult questions to answer. To be fair, its turnaround plan appears to be generating results. But long term, the question it faces was nicely summed up by the broker Charles Stanley last month: can the growth in new sources of revenue (other ITV channels, online, pay TV etc) and ITV Studios compensate for the hit taken by ITV1 as its formidable audience continues to fragment and decline?
There's also a worry about the lack of big events such as the Jubilee, or an international football tournament, to drive ads in the coming year. Oh, and The X Factor is showing real signs of decline (hooray!). The shares were at 77p when I said avoid, and they've come on strong since. They trade on about 11 times this year's forecast earnings, yielding 2.8 per cent. Too rich for me. I'd still steer clear.
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