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Can the ITV share price double your money?

At the time of writing, the ITV share price looks like a bargain. It’s currently dealing at a price to earnings ratio of just 10.3 and supports a dividend yield of 5.9%, which is around 1.4% above the FTSE 100 average of 4.5%. However, when you take a closer look at this business, it becomes clear the stock is cheap for a reason.

Cheap for a reason

City analysts believe ITV’s earnings per share will decline by around 10% for 2019 and it’s unlikely significant growth will return in 2020. Analysts are forecasting earnings growth of just 2.7% for the company’s 2020 financial year.

As the year has progressed, the City has been steadily revising its growth forecasts lower. At the beginning of the year, analysts were projecting earnings per share of 14.5p for the company in 2019 — around the same as 2018 figure. Now they’re forecasting earnings of just 12.9p, rising to 13.3p in 2020.

ITV’s problems are two-fold. The company claims Brexit uncertainty is hitting advertising revenue while, at the same time, it’s struggling to compete with US streaming giants, which are taking an increasing share of the UK broadcasting market.

As ITV falls by the wayside, advertisers are only moving away from the platform. The company is trying to fight back with its own online initiatives, such as the BritBox, the collaboration with the BBC, but I think this could be a bit of a waste of money.

The group is going to invest £25m on BritBox in 2019 and £40m in 2020, but that’s nothing compared to what others are spending. Wall Street analysts believe Netflix will spend $15bn (£11.5bn) on content in 2019 alone, that’s twice ITV’s current market capitalisation.

A bright spot

The company’s one strong point is its studios business, which accounts for around half of revenues and produces programmes for a whole range of broadcasters.

Growth in this business doesn’t depend on advertising revenue. Still, because the operation only accounts for around 50% of ITV’s sales, it can only cushion revenue declines in other parts of the business.

So, what does all of the above mean for shareholders? Well, it looks as if the future is uncertain for ITV. While there are some bright spots in the business, the fact the city expects earnings to decline overall this year, speaks volumes about the group’s prospects.

The bottom line

On that basis, from a growth perspective, I think the ITV share price deserves its current valuation. The dividend yield of 5.9% does sweeten the appeal, but if earnings continue to climb there’s a chance this distribution could come under pressure, although it doesn’t look as if this is going to happen in the next two years.

Overall, I think it’s unlikely the ITV share price can double your money. If you’re looking for stocks with multi-bagger potential, there’s plenty of other opportunities out there.

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Rupert Hargreaves owns shares in ITV. The Motley Fool UK owns shares of and has recommended 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.