Sky is down 25% over the past year, and Direct Line Insurance Group is down 12%. Why is this and do we sensea buying opportunity?
Pie in the Sky
Sky (LSE: SKY) has really beenthe limit for investors over the past year. Its share price has fallento earth, crashing 25% as its battles to fend offBTsaggressive bid for a share of the football rights market. Sky has clung onto the prime slice of the Premier League, although it was forced to pay over the odds to do so.However, with early season viewing figures falling, thiscould end up a zero sum game.
The picture at Sky isnt as bad as its share price might suggest.Its recent Q1update showed 5% growth in like-for-like revenues to 3.1bn. Its growing faster in its new European markets, 9% in Germany and Austria constant currency rates, and 13% in Italy. Brexit has helped: these euro revenuesspiral to 29% and 34% respectively when converted into sterling. Given its UK experience I reckon Sky has an open goal in Europe, where the digital market is far less developed.
Hollow crown
Weaker sterling spells pain as well as gain, given spiralling German Bundesliga rights, whichnow cost Sky 876ma year. Sky also has to raise its gamewhen it comes tocreating original TV content, an expensive business withNetflix paying100m foritstwo-series biopic The Crown. At the same time its tryingto cut 300m worth of costs, whileearnings per share are forecast to fall 10% in the year to 30 June 2017.
Sky isnt dirtcheapdespite its 25% share price tumble, trading ata forecast 13 times earnings and yielding 4.3%, but still looks a shining buy to me.
Direct action
In June, I describedDirect Line Insurance Group(LSE: DLG)as a surprise power play thanks to share price growth of a whopping 77% over three years, against a 5% drop on the FTSE 100 over the same period. Now its surprising on the downside, having fallen almost 13% in the past 12 months.
Motor and home insurance is a tough place to do business. Competition is razor sharp and margins wafer thin, with all-conquering comparison sites making things even tougher. Most companies spend as much onclaims as they geton premiums, and hope to make some kind of margin oncross-selling and investment gains.Two recent hikes in insurance premium tax, taking it from 6.5% to 10%, have made their job harder, as hasthe governments repeated failure to tackle fraudulent whiplash claims. Yetcustomers still feel theyre being ripped off withsky-high premiums.
Augusts results showed a 12.2m drop in operating profit to 323.6m, which was largely due to an 18.5m slumpin investment gains. Bouncy post-Brexit markets may have reversed this but well find out more next week, when the group publishes its Q3 trading update. Yielding 4% and trading at 13 times earnings, Direct Line is priced to go, even if it has lost some of its power to impress.
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Harvey Jones 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.
