The ITV (LSE: ITV) share price has fallen by more than 50% so far this year. That’s roughly double the 26% drop suffered by the FTSE 100.
I’d understand if you were a little nervous about buying into this business. But I think that the ITV share price is currently offering investors a fantastic buying opportunity. I’ve been adding to my personal holding of ITV stock in recent weeks. Here’s why.
Why has the ITV share price fallen so far?
I admit that ITV is facing a few challenges at the moment. Even before the coronavirus pandemic, advertising revenues from broadcast television were falling. Although online viewing is rising, this doesn’t generate as much ad revenue.
Covid-19 has made the situation much worse. Most filming has been halted. And many advertisers are cancelling planned ad campaigns. I suspect that companies that are still advertising may be paying lower rates than usual.
I’m not surprised that the ITV share price has crashed this year. But I think that investors are in real danger of going too far.
Here are three reasons why I’ve been buying ITV shares in recent weeks.
1. The ITV share price looks too cheap to me
Using last year’s performance as a guide, ITV shares currently trade on less than six times earnings.
The shares also look cheap to me on other measures. At the last-seen share price of 70p, ITV trades on just seven times 2019 free cash flow. And the group’s earnings yield – a measure of profitability used by business buyers – is high, at 14%.
Of course, 2020 profits are likely to be lower than in 2019. But this business hasn’t been shut down. It’s still ticking over. Ad revenue is still coming in, although at lower levels, and the group expects to benefit from a higher level of “library sales” to other broadcasters who need extra content to fill their schedules.
The latest forecasts from City analysts suggest that ITV’s earnings will fall by around 25% this year.
If correct, that would put the shares on a price-to-earnings ratio of 6.8. That’s roughly half the FTSE 100 average of 13. I think that’s too cheap.
2. Still very profitable
This company isn’t some loss-making tech start-up. ITV is a big and profitable business.
In 2019, the group generated a return on capital employed of 23%. Its operating profit margin was a healthy 16%. These numbers suggest to me that this business will probably remain profitable in 2020, despite the pandemic.
Although the firm has decided not to pay a final dividend for 2019, my calculations show that last year’s payout would have been covered by surplus cash from the group’s operations.
3. Look at the big picture
The UK economy is in a tough place at the moment. I expect the ITV share price to stay low for a little longer yet.
But this situation won’t last forever. ITV’s transition to content production and digital streaming will continue. Advertisers will need to spend money to support a return to business as usual.
The group’s production business is also a valuable asset, in my view. Last year, ITV Studios generated an operating profit of £267m. If the shares remain this cheap for too long, I think this business could attract a bidder.
Whatever happens, I expect the ITV share price to be much higher in a few years’ time.
