A few years ago, I’d have written about ITV (LSE: ITV) as a FTSE 100 stock. These days, it’s part of the FTSE 250 index, thanks to a 50% share price slump over the last two years.
Quite simply, investors have fallen out of love with traditional broadcasters. They think their future is bleak.
But I think they’re wrong about ITV. I topped up my holding at 59p in April 2020 and I’m still sitting tight today. Here’s why.
Why do investors hate ITV?
ITV is one of four free-to-air broadcasters in the UK. In recent years, the company has also ramped up its digital offering to persuade viewers to switch to watching via the ITVX app.
This on-demand service offers lots of content that’s not available elsewhere. ITV says it’s on track to generate at least £750m of annual revenue from digital services by 2026.
This will hopefully offset the long-term decline in advertising revenue from traditional television.
The big problem right now is that the advertising market is suffering the worst downturn since 2008, according to the boss of rival Channel 4.
ITV’s television profits fell by 88% to just £23m during the first half of 2023. I don’t expect March’s full-year figures to be much better.
Fortunately, the firm has another business that’s still growing. ITV Studios generated half the group’s revenue and a whopping 85% of its profits during the first half of last year.
Studios: a better business?
ITV Studios makes programmes for its owner and many others, including top streamers such as Netflix, Apple TV+, Disney+and Amazon Prime.
That means the firm can profit from the growth of streaming, even while it maintains its 33% share of the UK commercial television market.
Studios’ progress was set back slightly last year by the Hollywood strikes. But the company says it’s still on track to deliver an adjusted profit margin of between 13% and 15% over the next few years. Not bad.
I expect its contribution to ITV’s results to continue growing. One reason for this is that Studios is expanding steadily in the US market. Nearly 20% of its revenue now comes from North America, with a further 20% or so from other overseas markets.
If it can continue to expand in the huge American market, I think it could become a much bigger business.
Why I think it’s cheap
Of course, this situation isn’t without risk. There are signs that the streaming boom is over, and that spending is slowing. That could lead to lower growth for the Studios business.
ITV also still depends on advertising revenue for a big chunk of its annual profits. If this cyclical business doesn’t start to recover soon, 2024 could be a difficult year.
Even so, I think a lot of bad news is already priced into the shares. These currently trade on just seven times forecast earnings, with an 8% dividend yield.
It may be worth remembering that Entertainment One, another UK television producer, was taken private in 2019.
I estimate that if ITV Studios alone was valued on the same basis as Entertainment One, it would be worth £4bn today – more than the £3.2bn market valuation of the entire ITV business.
