ITV’s (LSE: ITV) share price has had a great run over the last three months. As I write this, ITV shares are changing hands for 134p, nearly 25% higher than the level they were trading at back in mid-July. Here, I’ll look at why the share price is trending up and explain, as an owner of the stock, whether I’d buy, sell, or hold the shares.
Why the ITV share price is rising
Firstly, it’s worth noting that ITV shares had a terrible run over the 12-month period to the end of June. Due to Brexit uncertainty, challenging conditions in the advertising market, the Jeremy Kyle debacle, and an underwhelming trading update in May, the stock fell from around 180p to just 110p. After a near 40% fall in a year, there was always a strong possibility we’d see a bounce.
The group’s half-year report was the first catalyst for a rebound. Here, results were better than expected. Helped by the tremendous success of Love Island, advertising revenue only fell by 5% during the first half of the year, compared to forecasts for a 6% fall. The company also reported online revenue growth of 18% and held its dividend steady.
Another driver of the recent share price surge has been takeover talk. In recent months, we’ve seen a number of international companies make bids for UK businesses that have seen their share prices beaten down due to Brexit uncertainty. Examples include Entertainment One, Merlin Entertainments, and earlier this week, Sophos.
Given ITV’s low valuation, a number of investors, including a few of my colleagues, believe that ITV could be a takeover target too and this has pushed the share price up.
Finally, there’s Brexit. In recent weeks, we’ve seen a little bit of progress in relation to Brexit talks which suggests we may not be facing a no-deal Brexit after all. This has boosted the pound as well as a number of stocks that generate the bulk of their revenues here in the UK, such as ITV.
So, there are four reasons why the shares have surged. Now, let’s look at what lies ahead and whether the shares offer value.
Going forward, ITV is aiming to transform itself into a digital entertainment company and content producer. Its goal is to strengthen its high-margin integrated producer-broadcaster business, continue to grow its content business, and create a new scaled and profitable direct-to-consumer business. Its vision ‘More than TV’ recognises that the market, and viewers’ habits, are rapidly evolving.
Personally, I believe that ITV has a sound strategy. There are execution risks, of course. For example, there’s no guarantee that the company’s BritBox streaming service, which it’s shortly about to launch, will be successful. However, overall, I think the company is heading in the right direction.
As for the shares, I continue to believe they offer value. Currently, the forward-looking price-to-earnings ratio is just 10.4, which is well below the FTSE 100 average. There’s also a monster dividend yield of nearly 6% on offer, which adds weight to the investment case.
That said, there are a number of other stocks in the FTSE 100 I’d buy ahead of ITV right now, given the risks that still exist in relation to Brexit and the UK economy. So for me, ITV is a ‘hold.’
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Edward Sheldon owns shares in ITV. The Motley Fool UK has recommended ITV and Merlin Entertainments. 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.