This FTSE 100 stock could be the bargain of the century

A P/E ratio under 10 and dividend yield over 5% may make this FTSE 100 (INDEXFTSE: UKX) stock a hidden value star.

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Even though the recent market pull-back dented valuations across the LSE, as of this week the FTSE 100’s average price-to-earnings ratio still stood at a whopping 25 times. While the index as a whole may not offer a plethora of value stocks, there is one company that’s caught my eye due to its below-average valuation and above-average dividend yield.

And it’s none other than TV broadcaster ITV (LSE: ITV), which sports a forward P/E ratio of under 10 and kicks off a healthy 5.03% yield that’s a full 100 basis points ahead of the FTSE 100’s. From a recent peak of nearly 260p per share in January of 2016, the company’s shares have fallen to a current price of around 155p as investors have grown bearish on its ability to adapt to a rapidly changing landscape.

But I believe at this price the company could be a fantastic hidden value option for long-term investors. While it certainly faces a tough outlook for traditional TV advertising, where revenue was down 5% year-on-year in 2017 to £1,591m, it’s fast-growing in-house production team is well-positioned to benefit from increased demand for fresh programming from a bevy of new customers ranging from Amazon to Netflix.

Indeed, last year the group’s revenue from its ITV Studios division jumped 13% to £1,582m while online and pay revenue rose a solid 7% to £248m. These non-traditional revenue sources, which are the future of the business, together with the cash cow broadcast TV business are a formidable pairing.

Last year the group’s £3,132m in external revenue generated £842m in adjusted EBITDA, which provides plenty of cash to continue investing in growing the in-house programming division and richly rewarding shareholders.

At its current valuation of just under 10 times forward earnings, I think investors are underestimating ITV’s ability to continue its progress in becoming a forward-facing production giant. With the cash to support this plan and a robust dividend, I reckon contrarian investors could find ITV a brilliant long-term buy at today’s share price.

Packaging up record growth

A more under-the-radar value stock benefitting from changing consumer habits is packaging specialist Macfarlane (LSE: MACF). This £133m market cap firm provides customers like ASOS with packaging materials and, more importantly, expert know-how that helps them ship more packages at lower prices and with fewer damaged goods when they arrive with customers.

And even though its share price has risen by a quarter in the past year, the company is still attractively valued at 12.3 times forward earnings with the added benefit of a well-covered 2.5% dividend yield and fast-improving balance sheet.

The company is growing nicely as it builds up the nationwide scale necessary to land larger accounts and also pushes into the booming e-commerce market. Last year sales were up 9% to £196m while the benefits of scale boosted pre-tax profits by 15% to £10m.

Looking forward, I expect Macfarlane to be able to match or exceed these figures as it opens new distribution centres, acquires smaller competitors and benefits from secular tailwinds boosting demand for parcel shipments. While the company is vulnerable to any economic downturn, I believe its low £14.3m in net debt, rising dividend and attractive valuation all provide a large enough margin of error for long-term investors.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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