The performance of the ITV (LSE: ITV) share price has been hugely disappointing in the last two months. It has fallen by over 10% at the same time as the FTSE 100 has declined by less than half that amount. Investors, it seems, are feeling relatively downbeat about the company’s future prospects.
While in the near term they may be correct, in the long run, the stock’s valuation suggests that it may offer excellent value for money. At a time when a number of shares, including one stock that released results on Tuesday, appear overvalued, ITV’s share price could have long-term investment potential.
An example of a stock which may be overvalued at the present time is Midwich (LSE: MIDW). The specialist audio visual distributor reported positive interim results on Tuesday which showed a rise in revenue of 25%. Adjusted earnings increased by 23% on a per share basis to 12.09p, with the company’s overall performance being strong. It was able to generate double-digit revenue and profit growth in all territories, while investment in new geographies and the development of specialist broadcast, lighting and audio segments boosted its financial performance.
Looking ahead, the company is expected to report a rise in earnings of 15% in the current year, followed by further growth of 8% next year. While this is an upbeat outlook which suggests that the stock is performing well, the investment potential of the company appears to be limited. It trades on a price-to-earnings (P/E) ratio of 27, which indicates that it lacks a margin of safety at the present time.
In contrast, the ITV share price appears to be dirt-cheap after its recent decline. It has a P/E ratio of around 11, which indicates that it offers scope to trade at a much higher level than at present. In the short run, the company’s financial outlook may appear to be downbeat, with earnings set to decline by over 3% in the course of the next two years. But with it having a dominant position in the television advertising market, the long-term growth prospects for the stock remain bright.
As a cyclical company, periods of disappointing financial performance are not unusual for ITV. In fact, they provide long-term investors with the opportunity to buy the stock at a low price, with improving earnings performance often being a good time to sell after making a profit.
While it may take a number of years for the stock to return to previous highs, it seems to have the right strategy and a sound management team through which to deliver improved performance. As such, and at a time when a number of FTSE 100 shares are trading on high valuations, now could be the right time to buy the company for the long run. While it may disappoint in the near term, its potential to deliver high total returns in the coming years still seems to be significant.
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Peter Stephens has no position in any of the shares mentioned. 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.