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Is the ITV share price a FTSE 100 bargain or a value trap?

I’m currently looking for a few candidates for purchase in my SIPP, and I took a look at ITV (LSE: ITV) last month. Since then, the share price looks like it might have bottomed out and, although that’s only over a very short timescale, it does have me thinking again it could be time to buy.

ITV’s problems are partly that it’s a cyclical business, and that TV advertising revenues have been under pressure for some time.

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Getting better?

But forecasts suggest earnings could be levelling out and I really do see strong signs of recovery. Viewing figures are strengthening, and the potential for its BritBox joint venture looks promising. And when I look at prospective P/E multiples of only around eight, I can’t help thinking the market has over-reacted (as it usually does at the bottom of a company’s short-term troubles) and that the shares are just too cheap.

Add to that a forecast dividend, which would provide a yield of 7.5% (while being covered around 1.6 times by earnings), and ITV is looking like an unmissable bargain.

Fellow Fool writer Andy Ross summed up the case for ITV pretty well, I thought, and offered an opinion with which I very much agree: “Management is running the company sustainably, sensibly and with a long-term view, which is a reassuring sign for any investor.”

Recovery

But wait. I’ve already mentioned the word “recovery”, and Andy uses it too in that article. And I’m becoming increasingly wary of buying into potential recovery stocks.

That’s largely because we’ve been seeing more and more companies that look like they might have passed their worst, only for a further crippling profit warning to emerge, or for the next set of results to disappoint again, and for share prices to fall further.

Against that, ITV’s troubles and potential recovery are more cyclical than anything, and I really don’t see any sign of anything fundamentally wrong with the company. And, unlike some more recent crisis stocks, there’s been no overhaul of top management, no “new broom” needed to sweep clean and start again. So I expect there’s less likelihood of the firm’s bosses finding a string of new problems to regale us with.

Disasters

ITV is nothing like Kier Group, for example, which has suffered from significant structural problems and brought in a new chief executive to try to get things back on track — who pretty much straight away told us that things were worse than the old boss had appeared to think.

And it’s not like Ted Baker or Superdry, which have both become victims to the fashion industry malaise — but, worse, are both single-label firms at the whim of the passing fancies of young people.

Fundamentally sound

I see nothing fundamentally wrong with ITV’s products, services, or fundamental business model. But it’s still at the mercy of where the UK economy goes in the next few years, and I’m not at all optimistic about that.

So I’m going to stick to my new rule of only buying into a recovery stock once I’ve seen the actual recovery under way. I do still like ITV’s potential but, for now, it’s going on my watch list rather than my buy list.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV, Superdry, and Ted Baker. 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.