Over the past 12 months, shares in ITV (LSE: ITV) have cratered thanks to concerns about the company’s ability to be able to compete with the likes of Amazon and Netflix.
However, today the company has gone some way to offset these concerns by revealing that trading so far this year is not as bad as many expected.
Improving outlook
The company announced this morning that total external revenue rose 5% in the three months to the end of March. All of the group’s divisions reported growth, particularly its online arm, where revenues expanded 41% year-on-year. Revenue from the production of content at ITV Studios increased 11%. Overall, Broadcast & Online revenue rose 3% to £526m as Online, Pay & Interactive rose 25%.
What’s more, net advertising revenue (NAR), which is closely watched by the City, grew 3% in Q1 and is “expected to be up 2% over the first half with continued strong growth in online and broadly flat ITV Family NAR.”
It seems ITV’s top line is benefitting from the firm’s content offering, which appears to be a hit with viewers. According to new CEO Carolyn McCall, total minutes viewed across the ITV Family grew 4% year-on-year while time spent viewing online via the ITV Hub jumped 31%.
Based on first-quarter trading, management believes ITV is on track to deliver double-digit growth in online revenue and good organic revenue growth in ITV Studios for the full year. But the update does warn that the results for the rest of the year will “reflect the timing of the Football World Cup.”
Time to buy?
In my opinion, these figures show that the concerns about ITV’s continued relevance in today’s rapidly changing media environment are overblown.
Rising NAR shows that advertisers still see value in the platform and the group’s efforts to diversify online and into production, are paying off. And if the company can build on its positive Q1 performance throughout the rest of 2018, I believe the shares could rise significantly from current levels.
Indeed, based on current City estimates, the ITV share price is trading at a forward P/E of just under 10, hardly a demanding multiple for a growing, cash-rich business. For comparison, international peers, including the likes of Vivendi SA, CBS, News Corp and Twenty-First Century Fox all trade at multiples in the mid-teens or higher. The UK media sector as a whole trades at a forward P/E of 14.
Considering the above, as ITV returns to growth I believe the firm’s valuation could move up to the sector average, which implies a share price of 216p based on current City earnings targets. If the company continues to perform better than expected, the market could place an even higher multiple on the shares. Twenty-First Century Fox, for example, trades at a forward P/E of 17. This would give a share price of 267p for ITV in the most bullish case.
That being said, following today’s positive update, it is possible analysts will revise their forecasts for growth higher in the months ahead, justifying an even higher valuation.
So overall, over the next 12 months, shares in ITV could jump by as much as 70% excluding dividends as the firm continues to defy expectations.
