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Should you buy Sky plc after it reports 7% sales rise?

Sky (LSE: SKY) has released an upbeat set of first quarter results. They show that the company is making good progress against its strategy. However, with competition in the quad-play space increasing, is Sky a buy for the long term?

Sky’s sales increased by 7% to £3.1bn versus the first quarter of the previous year. This was boosted by over 100,000 new customers joining the company, including Italy’s highest first quarter customer growth in four years. Sky’s like-for-like (LFL) revenue grew by 5% which reflects the innovative changes being made by the company.

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For example, Sky has launched its new streaming service, Sky Ticket, in Germany. It also launched Ultra HD in the UK, Ireland, Germany and Austria, while Italy saw the launch of Sky Go Extra. All of these changes increase Sky’s differentiation versus rivals and enhance customer loyalty. Sky also launched Sky Cinema in the UK, which drove movie consumption up by 8% year-on-year. Its launch of Sky Sports Mix has been successful too, with 3m households viewing it thus far. And the launch of the NOW TV broadband and TV combination should positively catalyse sales over the medium term too.

Of course, Sky is an international business following its merger with Sky Italia and Sky Deutschland. As well as improving its geographic diversity and reducing risk, this means it’s benefitting from a weaker pound. On a constant currency basis its sales increased by 7%, but on a reported level they rose by 13%. This shows that in the short term Sky’s financial performance should gain a boost from Brexit and this may push its share price higher.

Looking ahead, Sky is forecast to record a fall in earnings of 10% in the current year. This is disappointing and while Sky’s performance could be boosted by favourable currency effects, its valuation remains rather high. For example, Sky trades on a price-to-earnings (P/E) ratio of 15.1. This indicates that its shares are overvalued given the intense competition within the UK quad-play space.

A better buy?

Therefore, BT (LSE: BT-A) could prove to be a better buy. Its shares trade on a P/E ratio of 12.3 and it’s forecast to increase earnings by 8% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.5, which indicates that it offers growth at a reasonable price.

BT is in the midst of a major transformation. It’s integrating recently acquired EE into the business, while also investing heavily in its pay-TB offering and broadband speed. Alongside this, BT is offering significant discounts to new customers, which could provide significant cross-selling opportunities further down the line. As such, and while BT is a relatively risky buy because of the scale of change it’s going through, it could prove to be a better buy than Sky for the long term.

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Peter Stephens has no position in any shares mentioned. 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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