Key points
- The ITV share price fell 25% after its latest results were published
- CEO Carolyn McCall is planning a big push into UK streaming
- The shares now offer a forecast dividend yield of 7%
Recent results from television group ITV (LSE: ITV) got a very poor reception from the market. The share price fell by 25% when the numbers were released on 3 March and has not recovered much since.
As a shareholder, I dialled into the analyst call on the day and have spent some time digging through the 2021 accounts. Although the firm’s plan for the next few years contained a few surprises, I haven’t found anything to justify such a sharp sell-off. As I’ll explain, I think ITV shares could be seriously cheap today.
Why did ITV shares fall?
ITV’s financial results for 2021 were actually pretty strong. Revenue of £3,453m was ahead of 2019, thanks to a record level of advertising income. Profits were up too. Adjusted earnings of 15.3p per share were ahead of the 13.9p reported in 2019.
However, the market seems to have been spooked by ITV’s plans for the next four years. Chief executive Carolyn McCall has decided to replace the existing ITV Hub service with a new on-demand platform called ITVX.
ITVX will have around 15,000 hours of content available when it launches at the end of this year, compared to around 4,000 hours on ITV Hub today. Launching this service won’t come cheap. ITV expects extra technology costs of around £50m over the next two years. Programme spending will also rise by around £20m this year and £160m next year.
These big spending plans have upset investors, who are worried about falling profits. I can see the risks too, but I think ITV is doing the right things.
A “national champion”
McCall thinks it’s the right time to scale up in streaming television. She’s hoping to turn ITV into a “national champion” for streaming that will provide the best domestic content for UK viewers. I think this strategy makes sense, given our changing viewing habits.
ITV’s target is to double its digital revenues to £750m by 2026. This seems realistic to me. Momentum is already strong and ad revenue from ITV Hub rose by 41% last year.
However, there’s no escaping the big risks here. ITV is taking short-term pain in the hope of long-term gain.
Analyst forecasts suggest the company’s earnings will fall by around 7% in 2022, and a further 14% in 2023. From 2024 onwards, profits are expected to start rising again. But in reality, there’s no way to know whether ITV’s decision to go big on streaming will pay for itself.
Buy, sell, or hold?
Investing in a company with falling profits isn’t easy and can be risky. But in this case, I think the risks are already in the price.
ITV’s share price slide has left the stock trading on just six times forecast earnings, with a 7% dividend yield. That seems too cheap for me, for a business that still has high profit margins and a strong financial position.
If I didn’t own ITV shares, I’d be tempted to buy. As I’m already a shareholder, I’ve decided to hold onto my stock and watch the story unfold. I wouldn’t sell the shares at the moment.
