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Why the ITV share price could crush the FTSE 100

When a new boss takes over at a company whose shares have lagged the FTSE 100 by 25% over the last two years, investors usually expect a strategy update.

On Wednesday morning, ITV (LSE: ITV) chief executive Carolyn McCall revealed her plans for the future of the broadcaster. The former easyJet boss said that under her watch, “ITV will be more than TV”.

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Alongside advertising revenue, it aims to continue expanding its production business and increase its direct relationships with consumers. This will be done by offering “a range of content and experiences with a really trusted brand”. Examples include subscription services such as ITV Hub+, pay-per-view, voting, competitions and live events such as the Emmerdale Studios Experience.

A changing business

During the six months to 30 June, ITV’s total external revenue rose by 8% to £1,593m.

The bulk of this increase came from the ITV Studios business, where revenue rose by 16% to £803m. In contrast, total advertising revenue only rose by 2%, despite 48% growth in sales of online advertising.

Profits were hit by the World Cup, which resulted in “higher schedule costs”. This meant that although the adjusted operating profit from ITV Studios rose by 6% to £118m during the half year, profits from Broadcast & Online fell 12% to £257m.

Too cheap to ignore

It could take a couple of years for the CEO’s planned changes to deliver results. But the underlying fundamentals of this business still look very good to me.

Today’s figures show an operating margin of 17.9%, consistent with last year’s figure of 17.7%. Today’s results confirm plans to pay a dividend of 8p per share in 2018 and 2019, giving the stock a forecast yield of 4.6%. Alongside these attractions, the forecast P/E of 11.1 looks good value to me. I believe ITV shares could be worth buying at this level.

A winner at auction

Car re-marketing business BCA Marketplace (LSE: BCA) sold more than a million cars in the UK last year, mainly through its auction arm. The company also sold 362,000 cars overseas, highlighting the potential to expand into other markets.

For investors looking for a more aggressive growth opportunities than ITV, this £1.9bn FTSE 250 firm could be an opportunity. Its shares have nearly doubled in value since its flotation in 2014. Last year saw pre-tax profit rise by 34.5% to £87.6m and the group recently attracted a bid approach from private equity group Apax Partners.

Ultimately the two sides didn’t manage to agree a deal, as management reckoned the Apax proposal undervalued the company. Their confidence is backed by forecasts for earnings growth of 10% this year and an 8% hike to the full-year dividend.

What could go wrong?

BCA operates a number of large auction centres. In a UK recession, car dealers could see demand fall, reducing throughput via these facilities. This could lead to a substantial drop in profit. The group’s 3.6% operating margin is already slim, and could tumble if volumes fall.

A second risk is that the shares already look quite fully-priced to me, on a forecast P/E of 19. Although the forward yield of 3.9% is quite attractive, earnings cover is expected to be slim, at around 1.3 times. Overall, I feel there’s a growing risk of disappointment here. I’m not convinced this is the right time to buy.

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Roland Head owns shares of easyJet. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.