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Are ITV shares so cheap they are irresistible?

Sometimes shares fall because the company has deep problems. Sometimes shares fall because markets have underestimated the upside. ITV seems to fall into both camps. There is a potential bargain here, and I would say watch ITV (LSE:ITV), I mean literally watch ITV, to decide.

The latest results from ITV weren’t bad. Revenue was up 3%. Adjusted EBITDA fell £729m, but was better than expected.

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The big cloud hanging over ITV relates to advertising revenue, and of course the coronavirus is a major issue because this time of year normally sees a glut of advertising for holidays. These latest results applied to the year ending 31 December, too soon for any Coronavirus effect. Even so, advertising revenues fell, and are likely to fall even further.

The opportunity 

The opportunity for ITV is two-fold: production studios and BritBox. 

Globally, there is a thirst for quality TV content. Companies like Netflix have risen to this challenge. Netflix’s share price has also risen, indicating its success. British content is famous for its quality, and you don’t need the investigating powers of Poirot to see the opportunity.

That is where hope for ITV’s share price lies. Personally, I think the BBC has really raised its game in recent years with its drama. ITV has lagged behind, but in an era when quality content is at a premium, has a chance to capitalise on the very thing British TV is famous for.

ITV, in partnership with BBC, has a massive opportunity with BritBox. In the UK, the new service often gets a slating across social media, but then that Brits for you — they love to slate their own.

I think ITV can either sell its content worldwide via the likes of Netflix, or it can take a leaf out Disney’s book, and make its content exclusive to its own subscription service, BritBox.

Either way, if the content is good and has international appeal — like Poirot — then it can flourish. You can form your own opinion on its success just by watching TV.

Shares and the Midsummer effect 

ITV shares are now so cheap, that the dividend yield is around 7.5%. Often such high dividends point to a company with little growth potential. With ITV, this does not have to be the case.

There is also a coronavirus element to this that could benefit ITV. As the virus spreads, cinema viewings are likely to fall, as illustrated by the delayed launch of the latest Bond movie.

Inspector Barnaby might not be quite like James Bond, but the villages of Midsummer seem to be more dangerous than Spectra. Just as ITV is likely to suffer a knock from a coronavirus-related hit on some advertising revenues, I suspect that it will also see a coronavirus-related increase in viewings, not just because of falling cinema audiences, but because all those kids not going to school, and all those would-be commuters, home working — they might just tune in to a bit more telly.

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Michael Baxter 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.