This week saw Sky (LSE: BSY) acquire a 70% stake in Love Productions, which is one of the UK’s leading independent production companies that has been responsible for a range of programmes including Great British Bake-Off and the much-talked-about Benefits Street. The acquisition appears to be in line with Sky’s strategy to diversify its offering away from being a pure sport and movies operator, with the company seeking to offer greater value and more choice to consumers as it battles with BT on the sports front, and with Virgin Media in terms of content offering.
Indeed, Sky continues to offer significant long-term potential. Certainly, it is coming under increased threats, but its response of differentiating its product and communicating this to customers seems to be starting to bear fruit. Although Sky is set to report a decline in earnings per share (EPS) of 4% this year, it is expected to bounce back with an increase of 13% next year, which is approximately double the growth rate of a typical FTSE 100 stock.
Media Potential
Of course, the media sector is full of potential, with sector peers ITV (LSE: ITV) and Reed Elsevier (LSE: REL) also being relatively attractive. For example, ITV continues to show a large amount of consistency after its challenging period at the start of the credit crunch, with the bottom line increasing in each of the last four years and forecast to increase by 14% in the current year and by 11% next year. In addition, ITV offers good value for money at current levels, with the company trading on a price to earnings (P/E) ratio of 15.9. Although slightly above Sky’s P/E ratio of 15.6, ITV offers more growth for a similar price.
Meanwhile, Reed Elsevier continues to be the most volatile of the three, with the company’s bottom-line being up and down over the last five years. Next year should see a rather pedestrian growth rate of 6%, while shares continue to trade on a P/E of 16.6. As such, Reed Elsevier offers the lowest growth and highest P/E, thereby making ITV and Sky appear to be more attractive at current levels.
Looking Ahead
While Sky appears to be making the right moves when it comes to the increased competition it now faces, of which the acquisition of a stake in Love Productions is another example, it comes with greater uncertainty than ITV. Certainly, Sky has long-term potential, but a further erosion of its stranglehold on UK sports rights could be detrimental to future earnings. With a higher growth rate and only slightly higher valuation, ITV looks to be the better investment going forward.
