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Is Sky plc flying high after H1 results or should you tune into BT Group plc?

Sky (LSE: SKY) has been flying lately, its share price up around a quarter over the last three months, helped by December’s agreed $14.6bn takeover by 21st Century Fox. Today’s first-half results failed to inject extra rocket fuel, but still reflect a  a strong business.

Premier spend

Sky’s share price is up just 0.2% at time of writing despite the year-on-year £65m drop in first-half operating profits, which fell to £679m. However, group chief executive Jeremy Darroch pointed out that the company has been “absorbing” an additional £314m of Premier League costs over the period, and claimed that this actually highlights the strength of its underlying financial performance. 

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Another concern is that UK churn rate in the six months to 31 December climbed from 10.2% to 11.6% year-on-year, which Darroch blamed on the rising number of broadband customers, as they’re more likely to shop around and switch supplier. His new programme to reward loyal British TV customers should bring this down.

Smart thinking

Sky had plenty of positive news to report, with first-half revenues up 6% on a constant currency basis to £6.4bn. The company also reported significant progress on its growth strategy, and record on-demand viewing of 2bn streams and downloads. It also continues to build its European TV production studio, with 100 original series going into production this year.

The 21st Century Fox deal requires regulatory approval in Europe and Britain, and also need the backing of Sky shareholders. Today’s share price of £10.07 isn’t that far off the £10.75 Fox is offering, which suggests uncertainty over whether the deal will go through. This is notably below the £11.75 that Sky shares traded at just over a year ago, so this looks like a low-value bid, especially after today’s solid if not spectacular results.

Outfoxed

Last month my fellow Fool Alan Oscroft wrote that he saw the deal as “a vulture attack on a company whose shares are temporarily down”. After today’s solid-if-unspectacular results, it’s a point of view I share, especially at its current valuation of 15.9 times earnings. Sky looks a buy, but ordinary shareholders would be better off if Fox is told to do a runner.

Italian telecom disaster

While Sky has taken wing, BT Group (LSE: BT-A) has crashed to earth. Its share price is 35% lower than a year ago, with most of the damage done in the last disastrous week, following the Italian accounting scandal. BT won plaudits for tackling Sky on its home turf of Premier League broadcasting rights, only to suffer a crashing away defeat in its continental division.

As if its £530m Italian write-downs weren’t enough, its UK business is also facing a deteriorating outlook. Forecast revenues for the 2016/17 and 2017/18 financial years are now both expected to be flat but the big fear is that worse could come out of Italy.

I have been wary of snatching at supposing bargains ever since buying falling knife BP shortly after the Deepwater disaster, only to see the share price plunge as further bad news emerged. BT looks a poor call to me.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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