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The ITV share price is up 20%. Is it time to buy?

The ITV (LSE: ITV) share price has risen over 20% since mid-August, storming ahead of a near-flat FTSE 100. Fellow entertainment company, FTSE 250-listed Cineworld (LSE: CINE), is also up over the period, having gained 12%.

Is it time to buy? Here, I’ll give my views on the valuations and prospects of these two stocks.

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Transformative acquisition

It’s been a long time since I last wrote about Cineworld. I’ve been on the sidelines, waiting to see how it shapes up following its mega $3.4bn acquisition of US cinema group Regal Entertainment in early 2018.

The US is now Cineworld’s biggest market by far (75% of group revenue). Peak annual attendance this century in the US market was 1.6bn, as long ago as 2002. Audience numbers have declined steadily to 1.3bn in 2018, approaching 20% below the peak. Revenues over the same period are up in nominal terms, but down 17% on an inflation-adjusted basis.

On the face of it, to really thrive in the US, Cineworld needs an increasing share of a shrinking market. In its half-year results last month, it reported an 18.5% fall in Regal admissions and a 17.9% drop in revenue. This compared with a 9.4% decline in total US market revenue, and a 5.6% decline for US peer Cinemark.

So far, so underwhelming is my conclusion at this stage. At a share price of 238p (market cap £3.3bn) it trades at 9.6 times forecast earnings, with a prospective 5.6% dividend yield. However, I’d like to see evidence of improving performance in the US. And with it also having high net debt of $3.3bn, and gearing of 3.3 times EBITDA, I’m inclined to continue avoiding it for the time being.

Opportunities and possibilities

ITV is also on a cheap rating, despite the big rise in its share price over the last four weeks. At 125.75p (market cap £5.1bn) it trades at 9.8 times forecast earnings, with a prospective 6.4% dividend yield. In contrast to Cineworld, it has a strong balance sheet, with net debt of £1.1bn and gearing of 1.3 times EBITDA.

The current uncertainty in the UK economic and political environment, saw ITV post a 7% fall in external revenue in the first half of the year. Meanwhile, it continues to pursue its strategy of creating a stronger, more diversified business to enable it to take advantage of evolving viewing and advertising opportunities. Online revenues in the period increased 18%, and management is confident second-half revenues for its ITV Studios business will enable the studios to deliver a full-year increase of at least 5%.

Whatever the outcome of Brexit, the removal of uncertainty should benefit ITV, with advertisers better able to plan ahead. There may even be a significant one-off boost to this year’s revenue in the event government winds up spending £100m on advertising for a no-deal Brexit.

For the longer term, I think ITV is well positioned to deliver sustainable growth and attractive returns for investors as it becomes an increasingly digital entertainment company. The appeal of owning such a business and sterling’s current weakness may not be lost on overseas players. Witness US toy giant Hasbro‘s recently agreed takeover of UK film and content firm Entertainment One.

Seeing near-term possibilities and long-term prospects, I’d be happy to buy ITV shares today.

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G A Chester 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.