Has ITV’s share price become too cheap to miss?

The share price of this UK media and entertainment company has been falling. So is this stock now at a bargain level that I wouldn’t want to miss?

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The share price of UK media company ITV (LSE: ITV) has been steadily declining, dropping from 114p to 77p (so, down 32%) this year. It’s also down nearly 33% over 12 months. The majority of this fall occurred in early March, when the price fell roughly 40% in just under a week. 

This sinking share price may be confusing — particularly with the strong financial performance ITV reported for the 2021 fiscal year. However, the share price has been falling since huge operational disruption impacted ITV’s studios throughout FY19-20 due to coronavirus restrictions. Indeed, a £258m loss in revenue at the time significantly shook investor confidence in ITV. Such concerns were refreshed earlier this year with the announcement of a £0.12bn expenditure increase in the company’s ITVX streaming platform due in Q4 of FY22 .

A recovering performance

Despite concerns over revenue loss and planned expenditure, there’s still a lot of promise to be found in this UK business. As mentioned, it has shown an impressive recovery to overall stability and growth. A look at its financial statements for FY21 demonstrate this.

ITV’s investment expenditure now sits at £35m, a £7m increase from FY20. This growing expenditure was part of the company’s wider expansive strategy across FY21. ITV launched one of its primary products (Britbox) in South Africa in August. This led to a 50% increase in the network’s subscribers, now totalling 2.4 million. The company also managed to double its total available streaming content by December. As a result, monthly active users grew to 9.6m, representing a 19% increase. 

This strategy had very positive impacts on financial performance. Most impressively, the company improved operating profit from £365m to £519m, representing a huge 45% rise. Post-tax profit increased by £107m, bringing overall profit for the year to £388m. As for concerns over past stability, ITV managed to reduce its net debt from £545m to £414m. 

Risk preparation

But how much risk is ITV facing? Netflix’s recent stock plunge after the alarming departure of around 200,000 of its subscribers, has demonstrated that the media industry may not be as resilient as people had previously presumed during a pandemic and post-pandemic economy. 

The average daily minutes of TV viewing in the UK fell by 6% in 2021. More specifically, while ITV’s share of family viewing has remained largely consistent at around 22% since 2017, total user viewing across FY21 actually dropped by 9% to 15.1bn hours. This would suggest that ITV’s extra expenditure hasn’t been successful in increasing overall viewing. 

Moreover, the company’s dividend yield has been volatile since 2018, ranging between 2% and 6%. With its yield now sitting at 4.3%, I wouldn’t want to rely on ITV as a strong source of passive income. The stock’s low 8.3x price-to-earnings ratio (which sits far below the wider media industry’s current ratio of 36x) also fails to inspire confidence. 

Despite these concerns however, it’s clear that investment to expand the company’s Britbox network and increase monthly engagement have been successful. Such success has led to a recovering financial performance that has restored my faith in ITV’s managerial capabilities, despite it needing increased expenditure to get there. Too cheap to miss? Some might not think so, but I do and will look to add ITV shares to my portfolio.

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.

Hamish Cassidy has no shares in any of the shares mentioned. 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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