I think broadcaster ITV (LSE: ITV) is one of the cheapest stocks in the FTSE 100 today. But I don’t think it’s going to stay that way for long. In fact, I think the ITV share price could substantially outperform the FTSE 100 this year.
Here are the three catalysts I believe could drive the company’s outperformance during the next 12 months.
The first reason why I believe investors will return to ITV in 2019 is its depressed valuation. Indeed, at the time of writing, shares in the company are changing hands for just 9.4 times forward earnings. In my opinion, this undervalues the group’s prospects because it suggests that the business is not going to grow for the foreseeable future.
Granted, City analysts aren’t expecting much in the way of earnings growth for the next two years — earnings per share are forecast to remain constant until 2020. But I reckon in the medium term, ITV’s strong brand, position in the market, back catalogue of programmes, online presence, and studios business will enable the group to return to growth.
Right now, ITV’s valuation seems to suggest that investors are giving no credit to this future potential and I think the company has to prove to investors that it’s not a one-trick pony. Its full-year 2018 results should do just that, in my opinion.
One of the reasons why investors have rushed to sell ITV during the past few years is because it looks like the company has fallen behind peers like Netflix and Amazon. These are are investing billions of dollars in new content without adverts, streaming directly on demand into consumers living rooms.
The reality is, ITV hasn’t fallen behind. It’s investing heavily in online content, and online revenues are booming. During the first nine months of 2018, digital revenues increased 43% and revenues at the ITV studios production business grew 10%.
The business is planning to invest a further £60m over the next three years to drive growth at its ITV Hub streaming service. There’s also been some speculation that the broadcaster is planning to launch a rival to Netflix by combining its content with that of the BBC and Channel 4, to form what has been labelled a ‘British Netflix’.
I think additional online investment and progress towards creating a streaming service that could rival Netflix will only improve investor sentiment towards the company, and I expect ITV to give us further detail on its plans in 2019.
The third and final reason why I think ITV will smash the FTSE 100 in 2019 is its income credentials. At the time of writing, shares in the broadcaster support a dividend yield of 5.8%, around 1% above the FTSE 100 average, and covered 1.9 times by earnings per share.
This dividend yield implies investors will receive a 5.8% return on their investment in ITV in 2019, even if the shares don’t budge from current levels.
Over the past decade, the FTSE 100 has produced an annualised total return of 8.1%, which tells me that, to outperform the index, the stock only has to rise 2.3% in 2019. Considering ITV’s depressed valuation and catalysts on the horizon, I think it’s highly likely the company will not only be able to meet this target, but exceed it as well. That’s why my money is on the ITV share price in 2019.
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Rupert Hargreaves owns shares in ITV. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. 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.