There are plenty of compelling contrarian opportunities on the UK stock market today but rather fewer examples of companies that have done well and look set to continue their success. Media companies BT Group (LSE: BT) and Sky (LSE: SKY) are two happy exceptions.
Meaty, BT, big and bouncy
Five-year performance graphs for both these companies show a reassuringly upward sweep, with just a little volatility along the way. Over that time, BT has been the clear winner by delivering total growth of 177%, while Sky has grown “just” 40%. But everything is relative and that looks far more appealing when set alongside zero growth on the FTSE 100 over the past five years.
Both companies have delivered results in recent days, and both have plenty to beam about. BT was happy to broadcast its best results for seven years, with a 4.7% rise in Q3 revenues and forecast-busting 14% year-on-year leap in adjusted pre-tax profits. This was driven by strong growth in its consumer business that saw the first increase in landline business for donkey’s years, while revenue-per-user rose 7%. Whatever BT is on, I want some of it!
Broadband is now a utility that should be available to 95% of the country by the end of 2017, which is good news for Britain and BT, given that it took 71% of overall market growth during the quarter. As someone who remembers stodgy old British Telecom, BT’s mastery of modern technology (despite occasional hiccups like yesterday’s broadband outage) and aggressive gameplay for Premier League screening rights is a salutary shock. EE may have cost a pretty penny but it leaves BT boasting a strong proposition across landlines, broadband, mobile and TV. Trading at 15.75 times earnings, you can’t complain about BT’s valuation, and the low 2.5% yield is the price you pay for growth glory. Investors can hope for above-inflation hikes if BT continues its march to market dominance. This stock is meaty, BT, big and bouncy, and a buy.
Blue Sky thinking
BT is up 20% over the last year and Sky is also doing well, rising 16% over the same period. Remember, the FTSE 100 is down 14% over the same span. Sky recently screened its first-half results with the group adding 337,000 new customers in the second quarter alone, its best number for a decade. Like BT, Sky is showing growth across all markets, with first half revenues up 5% to £5.72bn. Operating profit rose 12% to £747m, while earnings per share grew by 10%.
With 21.5m customers, Sky has a strong domestic base to help support its expansion across Ireland, Germany, Italy and Austria. That’s a wise strategy given that the UK digital TV and broadband market must mature at some point, although growth initiatives such as NOW TV, Sky’s pay-as-you go service for occasional viewers, are mining rich new seams of customers. Once people have signed up for the services they find it difficult to switch off, especially if they’ve enmeshed themselves in a landline, TV, mobile and broadband bundle. Tough competition from BT will force up the cost of Premier League rights, but Sky will consider that a battle worth fighting.
Sky is the pricier bet, trading at 19.23 times earnings with a 3.05% yield, making BT slightly more tempting. If you find stock markets a turn-off right now, you can tune into either of these two.