Analysts' European Entertainment Stock Picks at Midyear Mark: ITV, Sky

Regulation Fears Hit Chinese Online Video Giants

Shares in Chinese online video giants Youku and Tudou took a dive this week as the Beijing government cracks down on online video with stricter regulations. The new laws will require Internet video providers to pre-screen all programming before making it available.

"All the uncertainties about the economy" make this a difficult time for stock pickers, says one analyst.

U.K. TV networks giant ITV is among the European entertainment stocks that analysts expect to do well as the second half of 2015 kicks off.

"In what we think will be more of a stock-picking than a macroeconomic/subsector-driven year, we prefer exposure to stocks that reward shareholders, increase earnings and protect themselves from structural challenges," a team of Nomura analysts wrote in December. Its top picks for the year were ITV, German TV giant ProSieben and French media and telecom giant Vivendi.

ProSieben and ITV were among the strong performers among European entertainment stocks during the first half of 2015.

At the midyear point, Liberum Capital analyst Ian Whittaker tells THR that he continues to be bullish on ITV. "Our top pick is ITV," he said. "We like the business model of TV advertising, global content play, strong balance sheet and possibility of retransmission fees for the main channels."

In comparison, Whittaker has a "sell" rating on the stock of pan-European pay TV giant Sky, in which Rupert Murdoch's 21st Century Fox owns a 39 percent stake. In a recent report, he lauded the company's success with its online-only video service NowTV, but also expressed concern that it could end up cannibalizing the company's traditional pay TV subscriptions.

In contrast, Sanford C. Bernstein analyst Claudio Aspesi calls Sky's more predictable business, due to a lack of reliance on economy-driven advertising revenue, a rare highlight in a challenging market. With the Greek debt crisis and uncertain economic outlooks, he tells THR that "these are hard times."

Which European entertainment stocks does he find attractive? "None really with all the uncertainties about the economy," he says. "Relative to the rest of the sector, Sky looks most attractive because pay TV is more resilient in a downturn."

Sky's stock has been benefiting as of late amid renewed debate about Fox's plans for its Sky stake as Murdoch is, as of Wednesday, focusing on his Fox chairman role, with son James Murdoch now CEO.

Enders Analysis said on Wednesday in a report that a new Fox bid for Sky was a question of "when, not if." A previous attempt to buy full control was abandoned amid the phone-hacking scandal. "The question is simply when would be the most favorable time to launch a bid," the firm's analyst team said. "The answer is probably not immediately, but in the next year or two. There are several reasons for thinking 21st Century Fox, and James Murdoch in particular, still want to buy Sky."

They added: "The commercial case for the bid has, if anything, strengthened since 2010." Plus, at an investor conference in February 2013, James Murdoch referred to Fox minority stakes like the one in Sky as “unfinished business." 

Meanwhile, Peel Hunt analyst Alex DeGroote is with Whittaker, saying he likes ITV for its "strong organic growth and developing content business." He also recommends WPP as a "best-in-class ad agency group."

Twitter: @georgszalai