ITV (LSE: ITV) has experienced a hugely challenging few years. The company has been hurt by the UK’s economic slowdown, with the economy’s growth rate falling after the EU referendum. As a cyclical stock, this has hit the company to a greater extent than many of its FTSE 100 peers, and means that it now trades at 170p versus a five-year high of 280p.
Looking ahead, there could be potential for a successful turnaround. As a result, now could be the right time to buy the stock alongside a FTSE 250 company which may also be on the road to improved performance after a difficult period.
On track to meet guidance
The company in question is breakdown and insurance company AA (LSE: AA). Its trading update for the six months to 31 July 2018 was released on Thursday, and it showed that it is on track to deliver on its previous guidance. It expects to record trading EBITDA (earnings before interest, tax, depreciation and amortisation) of between £335m and £345m for the full year.
The news represents a step forward for the business, it having disappointed investors in the recent past. Its phased programme of investment in the Roadside division is helping to deliver a differentiated member and product proposition. While this may take time to achieve its full aims of increasing new membership growth and having a higher retention rate, it seems to be making encouraging progress thus far.
Similarly, in its Insurance division there has been 7% growth in motor policies since 31 July 2017. This is in line with its expectations, while it is making progress in stabilising its home policy book.
Looking ahead, AA’s bottom line is expected to rise by 14% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.5. As such, a recovery could be on the cards following a share price fall of 36% in the last year.
Turnaround potential
ITV’s share price could also generate improving performance over the medium term. Although the company is forecast to record a fall in earnings of 4% this year and a marginal increase in the next financial year, its long-term prospects appear to be bright.
A new CEO is set to outline a refreshed strategy in the coming months which could act as a positive catalyst on the company’s financial performance. Operationally, the business has performed well, with it continuing to have a dominant position in terms of market share and being well-positioned to benefit from a recovery in advertising spend. And with the outlook for the digital segment being relatively positive in terms of growth, the prospects for the business could improve over the medium term.
Since ITV now trades on a price-to-earnings (P/E) ratio of around 12, it seems to offer good value for money. The prospect of it returning to its five-year high of 280p in the next couple of years seems limited, however, since it would require a significant upward re-rating or a major improvement in its guidance. In the long run, a successful turnaround is on the cards, with the stock seeming to have a bright future.
