SKY (LSE: SKY) is starting to struggle to maintain the pace of earnings growth it has delivered over the last five years. Earnings per share (eps) forecasts for 2015 have been downgraded by 15% over the last three months, while 2016 eps forecasts have fallen by 11%.
However, one thing Sky is good at is marketing. In this light, the firm’s decision to enter the burgeoning quad play market, by becoming a virtual mobile operator, looks very smart indeed.
Thanks to a new deal with O2, Sky will soon be able to offer its UK customers a Sky-branded mobile service. This will mean that the satellite broadcaster will be able to offer a complete quad play package — land line, broadband, mobile and television.
The clever thing about the deal, from Sky’s perspective, is that initial investment will be minimal.
The main effort will be marketing: advertising quad play packages to new customers and encouraging existing customers to increase their monthly spend by shifting their mobile packages to their Sky accounts.
Do customers want quad play?
Interestingly, Sky’s chief executive, Jeremy Darroch has previously claimed that there was not any “significant demand” for quad play in the UK market. He might be right — according to the Financial Times, just 2% of UK consumers are currently on quad play deals.
However, that number is 4% in Germany, 5% in France and 12% in Spain, where O2 parent company Telefonica is a big player in the quad play market.
Necessity = opportunity?
Sky has recently ramped up its debt levels in order to fund its European expansion. It can’t borrow the kind of money that would be required to buy a mobile network of its own, but it does need to find a way of increasing profit growth. Adding a virtual mobile offering to its product range could meet this requirement.
I believe that now may be a good time to enter the UK quad play market, and I’m not alone: BT Group‘s planned purchase of the EE network suggests that the UK’s incumbent operator feels the same.
Similarly, Vodafone Group is being touted as a possible buyer for Virgin Media, the UK’s current leader in the quad play market.
Is Sky a buy?
Sky’s valuation could best be described as full. The firm’s forecast yield of 3.6% is reasonable, but the shares trade on a demanding 2015 forecast P/E of 17, falling to 15 in 2016.
In my view, the best time to buy Sky would be on any short-term market weakness.