With the earnings outlook for many FTSE 100 stocks murky at best, it’s even harder than usual for investors to distinguish bargain shares from those that may struggle to recover. Notwithstanding this, there are some members of the FTSE 100 that certainly look great value to me. Among these is broadcaster ITV (LSE: ITV).
Viewing up, advertising down
With millions stuck at home, it’s no surprise that demand for the company’s content is up. Total viewing across its six channels rose 2% in the three months to the end of March with broadcast revenue rising 2% to £500m. As well as online viewing jumping 75%, the company also reported “good growth” in subscriptions for its Britbox streaming service.
Here, however, the good news ends.
Although total advertising revenue rose 2% (and online revenues shot up 26%) over the period, it’s all been downhill since then. Indeed, ITV booked a massive 42% reduction in the former in April due to the pandemic. When last month is included, total advertising is down a worrying 9% so far in 2020.
The fact that the FTSE 100 company had to pause filming from mid-March also meant that revenue at its Studios arm — where the majority of its 800 furloughed staff work — fell 11% to £342m.
All told, total revenue was 4% down (at £842m) in the three months to the end of March.
So, why do I think the company’s valuation is too cheap?
Bargain FTSE 100 stock?
Let’s be clear, ITV has its fair share of problems. Advertising revenue may continue to decline in the aftermath of the coronavirus. Indeed, the company said today the situation surrounding the pandemic was so uncertain that it would not be providing guidance for Q2 or the financial year as a whole. It also has to contend with giants like Netflix grabbing a greater share of viewers’ eyeballs.
It doesn’t get better from an income perspective either. Like many FTSE 100 stocks, ITV has withdrawn its final dividend from 2019 to preserve cash flow. This seems reasonable under the circumstances but it does mean that investors are no longer being compensated for their patience.
On the flip side, I think there are reasons to be optimistic.
While it will take time for things to return to normal, the production of some programmes (such as the chat show Loose Women) has resumed. Filming of The Chase and The Voice in Australia and The Chase in Germany has also started.
ITV is also financially sound. The £851m debt on the balance sheet at the end of March looks manageable and ongoing cost-cutting will surely help matters further.
Let’s not forget that this firm has a record of generating consistently high operating margins and great returns on the money it invests in its business.
ITV’s shares are now trading at half the value they fetched at the beginning of 2020. While Fools should be wary of anchoring themselves to a former price and news of a ‘second wave’ could send markets crashing again, this does at least suggest serious value to me. If analyst projections are right, ITV now trades on a little less than 7 times earnings. That’s far below its five-year average of 13 times.
The FTSE 100 stock won’t double in value overnight — it could go even lower in 2020. Nevertheless, I suspect those buying now and holding for a few years could see a very nice return.
Paul Summers 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.