Earlier this week, shares in broadcaster ITV (LSE: ITV) slumped after the company published its first-quarter results. While the numbers weren’t terrible, they didn’t meet City expectations.
Indeed, after the company’s peer, STV, which holds the ITV1 licence in Scotland, reported that its advertising revenues had risen faster than expected during the first quarter of 2019, analysts were expecting ITV to report a similar performance. Unfortunately, it didn’t. The group’s advertising revenues slumped 7% compared with the same period last year, to £417m.
On top of this disappointing performance, management also warned investors that revenue growth is unlikely to pick up throughout the rest of the year as ITV gears up for the launch of its global streaming service with the BBC.
ITV’s falling advertising revenues, coupled with management’s cautious outlook has sent shares in the company crashing to a multi-year low. The question is, could this be a good time to snap up the shares at a discount valuation?
Good news and bad news
At this point, I think it is reasonable to say that ITV is struggling. The company is blaming Brexit and the lack of major sporting events for falling advertising revenues, but analysts believe there are other problems with the firm’s proposition as well. Advertisers clearly aren’t getting behind the group’s digital initiatives, and that’s a problem. As analysts at City broker Liberim noted, “it looks like ITV’s digital channels have performed badly.”
Still, it isn’t a one trick pony. Its production business reported a 1% increase in revenues during the first quarter of 2019, and this division now nearly accounts for half of sales. The studios business has been behind some of the biggest television events in the UK this year, including Line of Duty — this year’s most watched programme in the UK.
What’s more, looking at the ITV share price right now, it seems to me as if there’s already plenty of bad news reflected in the price. The stock is trading at a forward P/E of 9.3, and it supports a dividend yield of 6.6%. Many of the firm’s international peers command P/E multiples in the mid-teens range.
Further to fall?
Considering all of ITV’s problems, and the company’s strengths, I’m a cautious buyer of the stock at current levels.
While it could be some time before the business returns to growth, I think the market is assuming the worst case scenario here. Investors seem to be overlooking the growing studios business as well as ITV’s market-leading position in the UK broadcasting market, and positive news could lead to a big re-rating of the share price in my opinion.
It might be a year or possibly more before any good news emerges, but with a strong balance sheet and highly cash generative operations, I reckon ITV has what it takes to stage a comeback. In the meantime, investors can pick up that 6.6% dividend yield.
