British Sky Broadcasting Group Plc: Buy, Sell Or Hold?

What are the long-term prospects for British Sky Broadcasting Group Plc (LON: BSY)?

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I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

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I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at British Sky Broadcasting Group

Today I’m evaluating British Sky Broadcasting Group (LSE: BSY), a British multichannel, multiplatform pay television services provider, which currently trades at 827p. Here are my thoughts:

1. Financial strength: The company is in excellent financial health. Net debt is only £1.1bn and comfortably covered by cash flow from operations of £1.8bn; interest cover is a hefty 17 times; and the company has generated more than £800m in free cash flow for the past 4 years.

2. Profitability: BSkyB has been one of most successful companies in the FTSE 100 for the past 10 years. Revenue per share and operating profit per share has doubled, while adjusted earnings per share and dividend per share has increased threefold and fivefold, respectively.

Recently, the company posted record results for the 12 months ending 30 June 2013. Revenue was up 7% to £7.2bn, operating profit increased by 9% to £1.3bn, and basic earnings per share grew 18% to 60p. In addition, the company added 3.3 million new subscriptions, for a total of 32 million.

3. Management: Jeremy Darroch has been BSkyB’s CEO since taking over from James Murdoch in Dec 2007. Prior to that, he was the company’s CFO from 2004 to 2007. He has successfully transformed BSkyB from a pay-TV provider to a triple-pay provider of television, telephony and broadband services and, under his helm, the company achieved its target of reaching 10 million subscribers.

4. Long-term prospects: BSkyB has dominated the UK pay-TV market for years offering the best content such as major sports events like rugby, football and cricket; and movies and television shows featuring Hollywood blockbusters and premium US drama along with original British productions.

It is the UK’s largest pay television service provider with over 10 million subscribers and has rapidly grown its paid-for-subscription products from 14 million in 2008 to 32 million today. Also, it has broadened its product offerings with mobile TV and video online demand and is the UK’s fastest growing broadband and telephone service provider with already around 4.9 million customers.

However, the company faces heavy competition in the coming years. Just recently, BT Group had acquired a share of the rights to Premier League football television coverage, which include the rights to 38 live games. Also, it struck a deal with Virgin Media allowing Virgin Media cable customers free access to BT’s sport offerings. Furthermore, over the top (OTT) video providers such as Google TV, Apple TV, Netflix and Amazon‘s Lovefilm could potentially take away market share.

5. Valuation: Shares are trading at a forward price-to-earnings (P/E) ratio of 14, moderately below its 10-year median P/E of 18. It also returns a prospective dividend yield of 3.6%, covered 2 times.

My verdict on British Sky Broadcasting Group

For the past decade, BSkyB was able to dominate the UK television space virtually uncontested. However, with increasing competition, this will be more difficult to do than in previous years. For one, the cost of acquiring the rights to premium content could increase –which already has happened as BSkyB had to pay 40% more for its latest Premier League deal. Also, the company will have to spend more to fend off competition, which could squeeze margins. More importantly, the company could lose its lock on some of its major offerings, which has been the source of its competitive advantage.

Nevertheless, I think it will be very hard to dislodge BSkyB from its perch atop pay-TV. It still offers the best content and its new services have rapidly grown, which could provide it with future growth opportunities. Moreover, the company is trading at a discount relative to both its historical P/E and to the wider market.

 So overall, I believe British Sky Broadcasting Group at 827p looks like a buy.

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

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