Shares in FTSE 250 broadcaster ITV (LSE: ITV) have dropped 11% from their 22 July one-year traded high of 88p.
This could indicate that the business is fundamentally worth less than it was before. Or it might flag that a bargain buying opportunity has arisen.
To find out which is the case for ITV, I examined the core business and looked at key valuations.
How does the business look?
ITV’s 15 May Q1 trading update showed external group revenue up 4% year on year to £756m.
Revenue at ITV Studios – the core production arm of the firm – rose 1% to £386m. This return to growth followed the end of the negative effects of the 2023 US writers’ and actors’ strikes. These had delayed £80m of revenue from 2024 to 2025.
The strong recent momentum of its ITVX digital offering continued, with 15% growth in advertising revenue.
ITV highlighted that the key Studios division is on track for 5% average annual organic revenue growth to 2026. A risk here is the intense competition in the sector that may reduce its margins.
Are the shares a bargain now?
The first part of my share price assessment involves comparing any stock’s key valuations with those of its competitors.
Starting with price-to-earnings, ITV’s ratio of 7.2 is bottom of the group, which averages 13.7. These firms comprise Métropole Télévision at 9.4, Atresmedia Corporación de Medios de Comunicación at 11.4, RTL Group at 15.9, and MFE-Mediaforeurope at 18.1.
So ITV looks a huge bargain on this basis.
It also looks a significant bargain on its 0.8 price-to-sales ratio against its competitors’ average of 1.2.
But on its price-to-book ratio of 1.6 against its peers’ average of 1.2, it looks overvalued.
To get to the bottom of this valuation, I ran a discounted cash flow analysis. This shows its shares are 60% undervalued at their present price of 78p.
So their fair value is £1.95, although share prices go down as well as up.
Should I buy the stock?
I am aged over 50 now and consequently am in the latter part of my investment cycle.
One practical ramification of this is that I focus on shares that generate a yield of at least 7%. Why this number? It is because I can get 4.6% from the ‘risk-free rate’ (10-year UK government bond yield) and shares have risks attached.
That said, ITV’s current yield is not too far off that level – at 6.4% — but it is not there yet.
Another consequence of my position in the investment cycle is that I cannot afford to take the risks I did when younger.
Basically, the longer one’s future investment horizon, the more time markets and stocks have to recover from any shocks.
Over and above the business risk in ITV, there is a price volatility risk from its sub-£1 share price. More specifically, each one-penny move in the stock’s price equates to 1.3% of its entire value!
However, for younger investors whose portfolios it suits, I think it is well worth considering. ITV is a leader in its field, which means to me that it should enjoy strong earnings growth over time. And it is this that ultimately drives any firm’s share price – and dividends – over the long term.
