Manager believes stock's position as high profile media offering could come to an end with it developing a cyclical nature
Reuters' results, issued last week, shot the global media company into the headlines on news that it was to slash up to 1,200 jobs from its worldwide operations.
However, stocks traded down on the news of the move to cuts costs, hand in hand with the new chief executive Tom Glocen's intention to refocus the business into groupings focusing on the end customer.
The company remains troubled though and some fund managers fear that its position as a high profile media content stock could soon end with the company developing into a more cyclical profile and being priced accordingly.
Rothschild Asset Management's Jonathan Groom, manager of the Five Arrows UK Major Companies Portfolio, said: 'It is still on a fairly high rating, but will in time become more transaction based. It is geared into people dealing in the investment markets and that is a much more cyclical business. Once it is recognised as more cyclical it will command a lower rating due to the lower quality, cyclical nature of its earnings.'
Reuters is also trading against a difficult industry backdrop, particularly in the US where Groom believes the economy, though avoiding recession, could bump along the bottom for longer than expected.
With cost-cutting becoming a feature of life at investment banks and other markets-connected institutions, Reuters could find competition increasing while demand for screens and services decreases.
The weak earnings backdrop, added to the potential re-definition of the stock as cyclical, led Rothschild analysts, Groom said, to view the stock as around 20% over-valued as of 26 July. Over the year to 26 July, Reuters has fallen by 26.61% while the FTSE All-Share has dropped by 12.58%.
British Sky Broadcasting (BSkyB) has fallen a long way over the past year and the descent has created a significant buying opportunity, according to Groom. BSkyB has fallen 35.91% from the start of the year to 26 July, compared to a 12.58% fall in the FTSE All-Share over the same time period.
Groom, who holds the stock in his UK Major Companies Portfolio, believes that BSkyB, which issues its results this week, remains the choice stock of its sector. He said: 'Our view is that the stock has fallen quite a long way, but it has been a bit overdone. The business is solid and the company is continuing to add subscribers.'
Groom believes that the aim of signing up seven million subscribers is not unrealistic, and with the average subscriber paying £400 per annum, that indicates a significant undervaluing of the company's stock.
That undervaluation offers, according to Rothschild, as much as 30% or more potential upside from the price, which was hovering around £6.70 on 26 July.
BSkyB, which has a brand that overshadows all its competitors, also has the advantage of not being so reliant on advertising, which has been hit hard by the global economic slowdown, something that has impacted prices in the sector, he said.
The company has also been fortunate in the failures of its competitors in the same sector. ITV Digital has failed to execute its business plan effectively, something that has given BskyB a much freer run.
There are risks, however. The OFT is conducting an investigation into its practice of packaging channels, although Groom does not believe that the risk poses a serious threat.
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