Today’s results from Sky (LSE: SKY) show that the company is continuing to make excellent progress, with the number of new customers acquired in the third quarter of the year rising by 70% versus the same period last year. And, with its top and bottom lines moving upwards at a brisk pace, investor sentiment is improving significantly and this is a key reason why shares in Sky are up by 4% today, and by 22% since the turn of the year.
This compares favourably to Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) share price movement, with it posting a gain of just 2% year-to-date. Looking ahead, though, can Sky continue its outperformance of Vodafone? Or, is Vodafone now the better buy?
European Exposure
With Sky having acquired its namesakes in Germany and Italy, it has a considerable exposure to the slowest growing region in the world: the Eurozone. However, while this could have held the company’s growth profile back in the past, in its most recent quarter Sky reported strong growth in both countries, with Germany in particular contributing significantly to its substantial rise in new customers.
Clearly, this is good news for Vodafone and shows that quantitative easing in the Eurozone could be starting to have an effect on consumer demand via improving confidence. And, while both companies are not wholly dependent upon the Eurozone for their growth, they look likely to benefit more than most companies from an improved outlook.
Product Offering
With Vodafone moving into pay-tv and broadband in the UK and Sky set to offer a mobile service next year, both companies are diversifying their product offerings. This is a sensible move, since the likes of BT and TalkTalk either have or soon will have a true quad-play offering, which may prove popular among customers and without their diversification, could have left Sky and Vodafone behind. Moving forward, Sky and Vodafone are likely to come under increased competition, which could lead to margin pressures for both companies.
Growth Potential
With the situation in Europe is improving, Sky and Vodafone are forecast to deliver impressive earnings growth numbers next year. For example, Sky’s bottom line is expected to rise by 19%, with Vodafone’s due to increase by 20%. These are extremely impressive growth numbers and show that, while last year was tough for them, both companies are set to bounce back and grow their bottom lines by more than twice the rate of the wider index.
Looking Ahead
However, when it comes to valuation, Sky appears to be considerably more attractive than Vodafone. That’s because it has a price to earnings growth (PEG) ratio of 0.8, which is half that of Vodafone. As such, it appears to offer more upside potential over the medium to long term and, despite its stronger share price growth since the turn of the year, Sky seems to be the better buy at the present time.
Of course, Vodafone’s yield of 5.2% is much more appealing than Sky’s 3%. However, with their exposure to the European economy being similar, their product offerings becoming more closely aligned, and their financial standing being equally impressive, the potential for capital growth is greater at Sky and this appears to more than justify a lower dividend yield at the present time.
