Do recent falls make ITV plc, Burberry Group plc & Restaurant Group plc a buy?

Roland Head takes a closer look at the outlook for ITV plc (LON:ITV), Burberry Group plc (LON:BRBY) and Restaurant Group plc (LON:RTN).

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Shares in ITV (LSE: ITV) have fallen by 19% so far this year, as markets have priced in a slowdown in the firm’s earnings growth.

After a long run of earnings forecast upgrades last year, 2016 broker estimates have been pretty much unchanged since February at 17.9p per share. This puts ITV shares on a forecast P/E of 12.6. This seems pretty reasonable to me, given the apparent quality of the business.

Last year, ITV reported an operating margin of 22.4% and earnings per share growth of almost 20%. Shareholders were rewarded with a 6p ordinary dividend plus a 10p per share special dividend to recognise the firm’s strong cash generation.

Despite these cash returns and several substantial acquisitions, the firm ended the year with net debt of just £319m. Given last year’s net profit of £495m, I don’t see this as a concern.

ITV’s dividend is expected to rise by a whopping 50% to 9.2p this year, giving the shares a forecast yield of 4.1%. Now could be a good time to top up.

Should you bet on China?

Companies with exposure to China are experiencing volatile market conditions at the moment. Burberry Group (LSE: BRBY) shares have fallen by nearly 15% over the last month, but are virtually unchanged from their New Year price.

In my view this could be a good buying opportunity. Although Burberry faces localised issues in China, where sales in Hong Kong and Macau have fallen heavily, the group’s business is fairly stable elsewhere.

Burberry’s trading update for the six months to 31 March showed that total revenue fell by just 1% to £1,410m during the period. Analysts expect full-year revenue to be broadly flat, with earnings per share down by 8% to 71.5p.

This puts Burberry shares on a forecast P/E of 16.5, with a potential 3% yield. However, it’s worth noting that Burberry’s shares are now cheaper than they were five years ago, despite the firm’s profits being 50% higher than they were in 2011.

Burberry has net cash of about £450m and continues to generate plenty of surplus cash from its valuable brand. In my view, these shares could be a good long-term buy.

Could you dine out on this big dividend?

If you invest in shares with high dividend yields, then Frankie & Benny’s owner Restaurant Group (LSE: RTN) has probably come onto your radar recently.

Three profit warnings in just four months have caused Restaurant shares to fall by 60% so far this year. However, the firm is currently expected to maintain its dividend at around 17p per share this year, giving a tempting forecast yield of 6.1%.

Frankie & Benny’s may need an image update, but Restaurant’s balance sheet remains very strong. The firm should be able to afford this dividend. The risk is that we don’t yet know the full scale of the firm’s problems.

I’d normally consider buying a stock after three profit warnings, but Restaurant’s latest update revealed that the firm’s chief financial officer has left with immediate effect. This usually means that the person concerned has been told to resign or be fired.

Restaurant shares now have a forecast P/E of just 8.5 and do look cheap. But I’m going to wait for more information before deciding whether to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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