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Why I’d Buy Sky PLC And ITV plc Ahead Of BT Group plc

Over the last five years, the performance of a number of notable media stocks has been superb. For example, ITV (LSE: ITV) has soared by 416%, while BT (LSE: BT-A) (NYSE: BT.US) has seen its share price rise by an impressive 223%. Even Sky (LSE: SKY), which is up a much lower 51%, has outperformed the wider index, with the FTSE 100 being up a rather lowly 29% in comparison. Looking ahead, though, Sky and ITV look set to outperform BT (and the FTSE 100). Here’s why.

Catalysts

A key reason for ITV and Sky’s impressive share price outlook is the fact that both stocks have a clear catalyst to push their valuations higher: strong earnings growth. For example, Sky is expected to post bottom line growth of 18% next year, while ITV’s net profit is forecast to rise by 14% this year and by a further 9% next year. As such, there is something obvious for investors to get excited about and, with the two companies trading on price to earnings growth (PEG) ratios of just 0.9 and 1.6 respectively, there is scope for considerable share price gains over the medium term.

For BT, though, there is not an obvious catalyst for share price growth. Its bottom line is set to fall this year by 3% and rise by just 5% next year. And, with its shares having a PEG ratio of 2.8, it seems unclear why the market would bid up its share price over the medium term. In other words, there is little for investors to get excited about.

A Clear Run

Furthermore, Sky and ITV have restructured their businesses in recent years and implemented refreshed strategies that are beginning to provide them with strong financial performance. In the case of Sky, it has merged with Sky Italia and Sky Deutschland and is a much bigger, more robust entity with a clear strategy for growth. Similarly, ITV’s management team seems to have generated a winning formula, with its mix of channels and programming having changed considerably in recent years and now providing the company with significant revenue growth opportunities.

While Sky and ITV are fairly settled businesses, then, BT is undergoing a huge change to its business model. It has broadened its offering through offering mobile plans and has invested huge sums of cash in sports rights as it tries to provide a viable pay-tv offering. And, while the quad play market has potential, BT’s strategy of winning new customers via free sports offerings and very competitively priced broadband/pay-tv deals is unproven, costly and may not generate the bottom line growth that the company is seeking.

Looking Ahead

BT also has the hangover of being a nationalised business that offered defined benefit pensions; its pension liability remains a drain on profitability. And, while it remains a high quality business with a bright long-term future, the risk/reward ratio does not appear to be as favourable as for Sky or ITV at the present time.

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Peter Stephens owns shares of ITV. 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.