ITV (LSE ITV) has had some riveting watches this year – including its own stock market performance. The ITV share price has risen by half in just five months.
Yet that still leaves the stock selling for 24% less than it cost five years ago. Meanwhile, the dividend yield is a tasty 6% and the FTSE 250 business aims to maintain the dividend per share at its current level, or raise it, in coming years (though dividends are never guaranteed).
Given that, could there still be room for the price to keep moving up?
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ITV could be overpriced…
Let’s start by looking at the bear case. After all, the share price decline in recent years has not been without reason.
Last year saw revenues down 3%, while profits after tax tumbled by more than half to £209m. The company’s studios business faces the risk of a slowdown in the ballooning demand seen in the past few years from content producers like Netflix.
Meanwhile, the legacy broadcasting business continues to shrink. ITV has been spending a lot of money to beef up its digital offering – eating into profits – and the outlook for advertising expenditure remain subdued.
…but it could still be underpriced
Set against that, the jump in the share price suggests that at least some investors like what they see.
The company’s investment in digital platforms could reap long-term rewards. The terrestrial business, though declining, remains substantial. ITV has a unique set of assets, from intellectual property rights for popular shows to its well-regarded production facilities.
Admittedly the studios business saw revenue down 16% in the first quarter compared to the same period last year. However, the company expects it to deliver the same annual revenue as last year. And it expects advertising revenue in the first half to rise 8% year on year.
The company expects to deliver £40m of cost savings this year and the latest pension scheme valuation should mean that funding is less of a drag on cash flows than has historically been the case.
Glass half full
I own ITV shares and continue to hold them – because I am more persuaded by the bull case than the bear case, even at the current share price.
I am not downplaying the risks of an industry that seems to have been in constant flux for a decade. But there are lots of positive elements here.
The price-to-earnings (P/E) ratio of 16 may not look like a bargain. But recall that earnings plummeted last year. If they can get back to where they stood before that – and I expect that they can – the prospective P/E ratio is in single digits.
For a profitable business with a wide competitive moat, ongoing demand and a 6% dividend yield, I see that as an attractive price.
