In the last week, shares in ITV (LSE: ITV) and Talktalk (LSE: TALK) have outperformed BT (LSE: BT-A) by 4% and 7%, respectively. Although only a short period of time, this trend of outperformance could be set to continue since BT faces a rather uncertain future.
That’s largely because of its ambitious expansion plans, with BT seeking to quickly dominate the quad-play space. As such, it has invested billions in sports rights and in rolling out superfast broadband across the UK. In addition, it has paid £12.5bn for the UK’s biggest mobile operator, EE, and the challenge for the company now is to successfully integrate all of its new services while delivering rising profitability.
While this is possible and could lead to a better, more profitable, business in the long run, there may be some teething problems in the short run due to the scale of transition. This could cause investor sentiment to come under a degree of pressure in the months ahead and with BT having a considerable amount of leverage as well as a major pension liability, the company’s risk/reward ratio looks somewhat unfavourable. As a result, long-term investors may be rewarded for being patient and awaiting a more sensible valuation.
Catalyst for rising shares
Meanwhile, ITV and Talktalk appear to offer excellent long-term capital growth prospects. In the case of ITV, current management has done a sterling job of turning the business around and improving profitability in each of the last five years. This has been done through improving the company’s content and also successfully diversifying and segmenting its offering through new channels such as ITVBe. And with ITV’s bottom line due to rise by 9% this year and by a further 7% next year, it seems to have a clear catalyst to push its share price higher.
With ITV trading on a price-to-earnings (P/E) ratio of 13.4, it offers greater upward rerating potential than BT, which has a P/E ratio of 14.2. The former also has brighter growth prospects than the latter, with BT’s earnings due to rise by 3% next year and 8% the year after.
Plenty of potential
Although Talktalk has endured a very difficult period following the hacking scandal, this could present an opportunity to buy a slice of the company at a more appealing price level. While Talktalk is likely to be hurt by reduced sales and lower customer retention following the hacking incident, in the long run its competitively-priced quad-play offering should allow it to deliver growing profitability.
Furthermore, with Talktalk trading on a price-to-earnings-growth (PEG) ratio of 0.9, its shares could continue the 21% gain of the last month over the medium term. That’s partly because investor sentiment appears to have shifted, but also because the quad-play potential in the UK remains high and may end up being a space in which there are considerable cross-selling opportunities even for established operators such as Talktalk.
