Since the beginning of June 2009, BTs shares have gained 380% (excluding dividends) while Skys shares have added 135% (also excluding dividends).
Over the same period, the FTSE 100 has only gained 56%.
Working for investors
BT and Skys performance over the past few years can be traced back to theirimpressive growth rates.
For example, between the end of fiscal 2010 and fiscal 2015, BTs net profit increased at a compound annual growth rate (CAGR) of 15.7%. Earnings per share alsoincreased by a similar amountover the same period.
However, revenue has fallen by around 3.0% per annum since 2010. The reason why BTs profit has increased while profit has slumped is simple. During the past six years, BTs operating profit margin has increased by 78%, around 14.5% a year.
Product cross-selling and higher margins products, such as pay-tv as well as broadband services, have been the key drivers behind this growth.
Sky has achieved similar growth rates to BT during the past six years.
Between the end of fiscal 2009 and fiscal 2014, Skys revenue increased at a CAGR of 7.3%. Net profit roseat a CAGR of 27.3%, and free cash flow per share has doubled over that period.
Whats more, according to figures from City analysts, by the end of this year Skys shareholder equity which is in some respects the underlying value of a company will have quadrupledsince 2010.
What does the future hold?
The big question is: will Sky and BT be able to maintain these lofty growth rates or are their days of growth behind them?
The City seems to be split when it comes to answering this question. On one hand, Skys sales are coming under pressure from the likes of online streaming services such asNetflix.Meanwhile, BT is trying to fight off competition in the telecommunications sectorfrom smaller upstartslike Talktalk.
On the other hand, Skys recent acquisition of its European peers has given the group an unrivaled position in Europes pay-tv market. Similarly, BT continues to dominate the UK telecoms market.
Cracks starting show
Unfortunately, for Sky at least, the companys business model is beginning to show signs of stress.
Specifically, the companys return on capital employed (ROCE), a key metric for measuring profitability compared to assets, is set to fall to 10.1% this year. In the past, Skys ROCE has averaged 30%.
A high double-digit ROCE often means that the company has a defensible edge versus its competitors. As Skys ROCE is falling, its reasonable to assume that the companys edge over peers is falling away.
BTs ROCE has increased by 50%, to 16.3% since 2010, but the company is facing other pressures.
These include issues with the competition commission, a brutal pay-tv price war with Sky, a ballooning pension deficit and sliding earnings at the companys legacy fixed-line business.
Overall, with competition increasing, BT and Skys growth may slowfrom a high double-digitto mid-single-digit rate over the next few years.
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