As I write, ITV (LSE: ITV) shares are trading at 67p. Its share price has now fallen by 45% over the last year, despite a strong trading recovery in 2021.
The market just doesn’t seem to like ITV at the moment. The television group’s shares trade on just five times forecast earnings, with a whopping 7.5% dividend yield. I think this is far too cheap and have added ITV to my portfolio. Here’s why.
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Progress on track
In 2021, ITV reported record revenue of £3.5bn and a strong recovery in profit. Progress continued during the first quarter, with revenue up 18% at £834m, compared to the same period last year.
The company said progress in the ITV Studios business was particularly strong, with revenue up 23% to £458m. Studios produces programmes for ITV and other television groups, including the big streamers.
Meanwhile, advertising revenue from the group’s broadcast and streaming operations continued to recover and was 16% higher than during Q1 last year.
Overall, ITV’s performance so far this year appears to be on track.
Why are ITV shares so cheap?
Of course, there are some risks here. In the short term, advertising revenue in May and June is expected to be below last year’s levels, due to the boost from the Euro 2021 football tournament.
However, advertising revenue for the first half of the year is still expected to be 7% higher than in pre-pandemic 2019, so I’m not too worried about this.
I think what’s really spooking investors is ITV’s decision to invest in an upgraded streaming service, ITVX, to replace its Hub and BritBox offerings. ITVX will be available as a free, ad-funded service, but there will also be an ad-free subscription option.
When ITVX was announced in March, ITV’s shares fell 30%. I suspect investors are worried that ITVX could be an expensive project that doesn’t generate much extra profit. That’s a risk. But in my view, it’s a necessary risk.
A big technology upgrade?
The way I see it, ITV’s strategy is partly just a technology upgrade. Increasingly, we don’t watch television through an aerial, we stream it. Speaking personally, our household TV aerial stopped working a couple of years ago. We haven’t bothered replacing it.
Similarly, Sky now offers a streaming version of its satellite service. Who will want a satellite dish, when they can get the same service over broadband?
To be fair, I would be worried if ITV was trying to go head-to-head with streamers like Netflix. But it’s not. While ITV does have an international subscription business, its main focus is still the domestic UK market.
ITV has a 35% share of UK commercial television viewing. In my view, the group’s ITVX strategy is designed to protect this market share while also attracting new viewers from overseas.
Financially, the plan looks manageable to me. ITV’s debt levels are quite low and operating profit margins are expected to remain healthy, at around 20%.
ITV’s forecast dividend yield of 7.5% looks safe to me and I believe its shares are too cheap. I plan to keep holding. I think its shares should perform well if the company can deliver on its plans.
