Does the ITV share price have dramatic upside potential?

ITV has been a FTSE 100 yo-yo stock: the company is exposed to structural as well as cyclical challenges – but is the share price simply too cheap to ignore?

| More on:
Arrow symbol glowing amid black arrow symbols on black background.

Image source: Getty Images

In recent weeks, I’ve been looking at the rare beasts of the FTSE 100 whose shares can be bought for less than £1.
So far, I’ve discussed Rolls-Royce and Lloyds, and identified what I think are credible reasons why both companies could deliver high investment returns.
Today, I’m turning the spotlight on the third blue-chip name that currently trades as a penny stock. The ITV (LSE: ITV) share price is 75p, as I’m writing. Are there reasons to believe it could have similar upside potential to Lloyds and Rolls-Royce?

Big fundraisings

Lloyds and Rolls-Royce are penny stocks today, because they’ve been through the same class of corporate event. Both have faced crises in which they had to issue masses of new shares to raise funds.

In the case of Lloyds, this was during the great financial crisis and recession of 2008-09. In the case of Rolls-Royce, it was in 2020 during the Covid-19 pandemic.

Lloyds went into the financial crisis with 6bn shares in issue and came out of it with more than 60bn. Rolls-Royce had less than 2bn shares in issue before its 2020 fundraising and more than 8bn after.

In theory, if the number of shares in issue increases by a factor of ‘X’, the value of each individual share should decrease by the same factor. In this way, the value of the whole company, before and after the event, remains the same.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

It’s been different at ITV

ITV was formed by the merger of Granada and Carlton Communications. The enlarged group’s shares started trading at 141p on 2 February 2004 and its market capitalisation of £5.8bn made it a FTSE 100 stock.
Unlike Lloyds and Rolls-Royce, there’s been no huge change in ITV’s number of shares in issue (around 4bn) over the years. Its current market capitalisation is £3.2bn. As such, the market is pricing ITV today as a significantly less valuable business than in 2004.
Clearly, the upside would be substantial, if the market were to return to valuing the shares at the 141p level of 2004 — let alone their peak of double that in 2015.
Are there reasons why market sentiment for the stock could improve? Or have there been fundamental changes to the company’s prospects that make it an inherently less valuable business today?

Yo-yo stock

ITV’s business is highly sensitive to the state of the broader economy. About half its revenue comes from advertising, and customers tend to cut their marketing budgets when there’s an economic downturn.
The company has yo-yoed in and out of the FTSE 100 through economic cycles. It was relegated to the second-tier FTSE 250 in 2008, before returning to the top index in 2011. And it was relegated again in 2020, only to be promoted back last year.

Not all about economic cycles

However, if ITV had released its latest annual results a day earlier than it did, it would once again have dropped out of the FTSE 100. Its shares crashed 28% on the results, but the quarterly FTSE index review was done the day before.
Ironically, the company reported record advertising revenue in the results. The market response showed that sentiment for the stock isn’t all about economic cycles.
As well as being a hostage to those cycles, ITV faces challenges from a structurally changing industry and intense competition for viewers. The negative reaction to the results was very much a reflection of investor concerns about these challenges.

Hey big spender

ITV detailed the next phase of its ‘More Than TV’ strategy in the results. The market baulked at the amount of investment that management feels it needs to make over the next five years to keep the company and its content competitive and relevant in the global entertainment market.
Berenberg analyst Sarah Simon summed up the market’s concerns about the company’s prospects. “They’re spending more because they’re losing eyeballs,” she told the Financial Times. “You’ve got Netflix, Amazon, Peacock, Discovery+, Facebook Watch, YouTube — there’s just so much [competition].”

Cheap valuation

At the current share price of 75p, the market is valuing ITV at less than six times forecast 2022 earnings, with a prospective dividend yield of over 6%. I think this valuation may be a little too cheap.

Having said that, I can’t see investors moving to rate the stock as a very high-value business, given its sensitivity to economic cycles, and the level of investment now needed to compete in the global entertainment market. On this basis, I don’t see as much upside potential here as at Lloyds and Rolls-Royce.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Graham Chester has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Lloyds Banking Group and 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.

More on Investing Articles

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

An under-the-radar FTSE 100 stock to combat stagflation fears

As the share price of this blue-chip FTSE 100 stock falls below Covid-levels, why I added it to my portfolio.

Read more »

Man smiling and working on laptop
Investing Articles

This stock market sell-off could be my buying opportunity of the decade

The market sell-off has been brutal, but this Fool thinks it offers him a compelling opportunity to make big money.

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

After falling 60%, is the Ocado share price a bargain?

The Ocado share price has fallen heavily in the past year. But our writer is still not buying it for…

Read more »

Hedge shaped as the pound symbol inside a glass piggy bank
Investing Articles

A question investors need to ask about the Woodbois share price

The Woodbois share price has declined a little from its peak in early May. Does that mean I should buy…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value stocks I’d buy right now

Roland Head thinks market conditions could favour value stocks over the coming year. He’s found three he’d like to buy…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

These 5 FTSE 100 shares have crashed in 2022. I’d buy one now

These five FTSE 100 shares have plunged in value over the past six months. But I believe one of these…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

Is Scottish Mortgage Investment Trust now a bargain growth stock?

The Scottish Mortgage Investment Trust share price has plummeted nearly 50% from its 52-week high. Is this a great opportunity…

Read more »

A couple celebrating moving in to a new home
Investing Articles

2 key stock picks for reliable passive income

I’m looking at stocks that can deliver reliable passive income to complement my growth picks, and I think I’ve found…

Read more »