Is It Game Over For BT Group plc, Sky PLC And Talktalk Telecom Group PLC?

Should you run a mile from these 3 stocks? BT Group plc (LON: BT-A), Sky PLC (LON: SKY) and Talktalk Telecom Group PLC (LON: TALK)

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The quad play market has been in the headlines during the course of 2015. Although it has a fancy name, it’s essentially just a bundling of four services, namely broadband, landline, mobile and pay-TV into one package with one supplier.

Clearly, the thinking among suppliers is that it will allow them to cross-sell their new products and services to existing customers. As such, the cost per ‘new’ customer may be a lot less than it was in the past, thereby leading to higher margins and profitability over the medium term.

The race for customers

As a result, the likes of BT (LSE: BT-A) have been spending vast sums on sports rights, as well as investing in pricing in order to obtain as many customers as possible so that the company can cross-sell its mobile offering to them. Furthermore, BT is in the process of buying EE, which is the largest UK mobile company and this will allow it to cross-sell even further.

While this is a good idea in practice, the reality is that the quad play market may not be as appealing as first thought. A key reason for that is the immense cost that BT, for example, is paying. It forked out £900m on Champions league football rights, is paying £12.5bn for EE and with a highly indebted balance sheet and a vast pension liability, the company’s financial outlook appears to be somewhat riskier than before its move into quad play.

Under-pressure margins

Furthermore, rivals such as Sky (LSE: SKY) have the same strategy as BT. Sky is set to move into mobile over the medium term and with it competing with BT for sports rights, the two companies are pushing costs ever higher. While this level of competition may be good for consumers, their margins may come under a degree of pressure. And while Sky is trying exceptionally hard to differentiate itself from BT through unique channels and investment in production companies, most pay-TV customers remain less sticky than hoped and are still focused on price and sports rights.

That said, Sky is expected to increase its bottom line by 13% next year and with the company trading on a price-to-earnings growth (PEG) ratio of 1.3, it appears to have a reasonably wide margin of safety. For BT though, a PEG ratio of 2.2 lacks appeal – especially with its balance sheet being less robust than that of Sky.

Potential winner

Meanwhile, Talktalk (LSE: TALK) is another quad play operator. Having endured a difficult 2015 after being the victim of a hacking incident, has posted a fall in its share price of 26% since the turn of the year. Clearly, the company could lose customers and fail to gain new ones in the short-to-medium term and so may be viewed as less appealing than its quad play rivals.

However, with Talktalk trading on a PEG ratio of just 0.3, its margin of safety appears to be sufficiently wide to merit investment at the present time. Certainly, its performance in 2016 may not be as strong as was anticipated prior to the hacking incident, with a loss of reputation almost inevitable following such a major challenge. However, even taking this into account and also factoring in the potentially increasing level of competition within the quad play space, Talktalk could prove to be a stunning investment for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of TalkTalk Telecom Group plc. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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