Fattening Up on Couch Potatoes
06/10/2009 10:42 am EST
Conservative plays like UK broadcaster BSkyB are the best values in a tough economy and frothy markets, writes Allan Nichols in Morningstar InternationalInvestor.
After international stock markets were hit harder than the US market by the economic crisis last year, they are bouncing further this year, [and changes in] price/fair value ratios went up significantly more for the international stocks Morningstar covers.
While the median P/FV ratio for US stocks moved from only 0.87 to 0.88, developed-markets stocks popped, with the median stock going from 0.82 to 0.88, and emerging markets stocks jumped even more, with the median moving from 0.90 to 1.0
This means the median emerging-markets stock that Morningstar covers is now fairly valued. We haven’t seen that situation since December 2007. Obviously, emerging markets aren’t back to the level they were 18 months ago, but with the reduction in fair value estimates since then, Morningstar’s analysts think the value is back to the equivalent level. Meanwhile, developed markets remain at a 12% discount on average.
The data provide additional support to my contention that stock markets have run up faster than improvements in the economy warrant. There are still some stocks that are quite cheap, while others are very expensive. I don’t think now is the time to be investing aggressively. I expect markets to remain volatile and high-quality stocks with moats [to] outperform over the next two years, though not necessarily every month.
BSkyB (LSE: BSY, NYSE: BSY) [is one such] standout performer in a very difficult economy. British Sky Broadcasting reported results for the nine months ended March that were a bit better than our expectations, but we are maintaining our fair value estimate. Revenue through the first nine months reached GBP 3.96 billion ($5.9 billion), an increase of 7%, versus our full-year expectation of 6% growth.
We are very pleased to see the firm continue to increase revenue and subscribers despite the very weak British economy. BSkyB added 80,000 net new customers and increased the proportion of its customer base that takes multiple services. The firm added 130,000 broadband and 195,000 telephone customers, and 15% of customers now subscribe to all three products, up from 9% one year ago.
We have been concerned about increasing competition in the broadband and phone markets, but the firm was able to increase its average revenue per user to GBP 452 annually from GBP 424 in the [same period a year ago. That] enabled BSkyB to increase its operating margin to 15.5%, a bit above our full-year expectation of 14.8%. In general, the firm has benefited as more people stay home for entertainment [and] customers are opting for more expensive packages. But the United Kingdom is far from out of the woods, and [BSkyB] could still see some pressure on growth and margins over the coming quarters. (The ADR closed at $29.60 in New York Tuesday—Editor.)