After a solid set of figures, we look at the prospects for ITV.
Over 98% of British households possess a television set and the average person watches TV for more than four and a quarter hours a day. One way to invest in the TV programme business is via ITV (LSE: ITV), Britain's largest free-to-air television station which is entirely supported by advertising revenues and programme sponsorship.
ITV has had a rough few years; particularly 2008 when it lost more than £2.5 billion. However, 2009 has produced a distinct improvement as ITV returned to profitability and its results for the first half of 2010 were surprisingly good.
ITV is a recovery story for investors who've got a strong nerve, especially now that it has signalled its intention to enter the pay-TV market.
Death of a monopoly
I wrote last year about how ITV's profits had fallen sharply in recent years because its monopoly over UK television advertising had been eroded.
With Britain having gone from just the one commercial channel in the early 1980s to several hundred today, thanks in large part to BSkyB (LSE: BSY) and other broadcasters who use Sky's platform, ITV can no longer offer its advertisers the level of exclusivity that it once could.
If that wasn't bad enough, ITV faces extra competition for the attention of its target audience from the newer forms of home entertainment such as computer games, DVDs and the internet.
The overall effect has caused ITV's ratings to fall sharply, thus reducing its income. The days when 25 million would watch Coronation Street and Inspector Morse are long gone; today's top-rated shows attract less than 10 million.
Lower profits means cheaper TV
When looking at advertising-funded television you should always bear in mind that viewers are not customers. ITV's customers are those businesses which run advertisements on its four stations; ITV sells an audience to advertisers.
ITV has adapted to falling audiences by cutting its costs, in particular by making far fewer dramas. ITV now focuses upon shows which attract a moderately-sized audience at a much lower production cost.
It's this cost cutting which lies behind the explosion in the number of reality TV, house buying, DIY and makeover programmes in recent years. An hour of reality TV can cost less than 10% of the cost of a top-notch period drama, so it's no surprise that the accountants who are the driving force behind the vast array of celebrity pet DIY makeover cookery programmes on television.
The growing market for audiences who watch high quality drama is increasingly shifting to the BBC and pay-TV channels. This is where ITV's new pay-TV venture could be the making of the company (more on this later).
Show me the money
ITV's results for the last five years are as follows. Those of a nervous disposition might care to look away now!
|Total Sales (£ million)||1,879||2,029||2,082||2,181||2,196|
|Diluted earnings per share||2.3p||(65.8p)||3.5p||5.4p||5.3p|
|Dividend per share||Nil||0.675p||3.15p||3.15p||3.12p|
The last decade has been rough for long-term shareholders, many of whom have probably felt like throwing in the proverbial towel on several occasions. With a steady decline in sales, profits and dividends it's no surprise to find out that ITV's current share price of about 50p is well below what it was five years ago. However, the results for 2009 have given the shares a boost, causing them to rebound from their low of 18p.
In its most recent figures ITV highlighted an adjusted earnings per share figure, one which excludes goodwill write-offs and one-off charges. With ITV writing off almost £2.7 billion worth of intangible assets in 2008, it's prudent to completely ignore the adjusted eps because you cannot reasonably assume that this was the last of the write-offs.
ITV's half-yearly results, published a few weeks ago, made pleasant reading for shareholders as the company returned to profitability, earning 1.8p per share compared to a loss of 1.8p for the first half of 2009.
Looking at ITV's balance sheet we see that it contains £3 billion of assets, of which almost £1 billion is intangible assets. When we take into account the £2.5 billion of liabilities, which includes a pension scheme deficit of almost £450 million, there's nothing there for investors who like their companies to have a tangible net asset value.
The decline in TV audiences means that ITV's advertising rates may come under further pressure. ITV has reacted to the fragmenting market by launching three other channels, ITV2 through 4, which are doing well.
The most interesting development is that ITV is moving into the pay-TV market having recently announced that it will start broadcasting several high definition subscription channels within the next twelve months.
Whilst ITV lost a fortune on its last venture into pay-TV, the ill-fated ITV Digital, hopefully it will learn from the American cable television networks HBO, Showtime and Starz. These stations have proven that broadcasting to smaller audiences on pay-TV stations can be highly profitable provided that you control your costs.
An interesting development is that BT (LSE: BT-A) is in direct competition with Sky television as it can now offer Sky's sports channels. Should this battle heat up then this could help ITV's position. After all anything which increases your major competitor's costs whilst simultaneously decreasing its income is good for your business (until they turn their attention to you!).
Braver souls than me might well consider ITV as a speculative investment, provided that they are willing to take the view that ITV will continue to reduce its costs and that its pay-TV operations will prove to be profitable. It's going to be a bumpy ride!
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