Stock markets have rallied strongly since the middle of March, with the FTSE 100 up over 26%. But there are still plenty of bargains. In my view, ITV (LSE: ITV) shares are one of the biggest bargains of them all.
The problems with ITV shares
ITV shares are down around 48% this year and there are certainly good reasons. Firstly, advertising, which accounts for half of ITV’s revenue, has taken a massive hit. With limited consumer activity, firms have cut back on advertising spending. Despite an increased number of viewers over lockdown, this has meant that profits have fallen sharply for the broadcaster. In addition, production on many of its shows has been halted due to lockdowns. This has included soaps, Love Island, and the Britain’s Got Talent Live Finals. The postponement of the UEFA European Championships 2020 will also damage advertising revenues. But while there are problems with ITV shares, I believe that there is still much promise for the FTSE 100 stock.
Strong fundamentals will certainly help
ITV has a strong balance sheet that should help it survive the crisis. This includes a large amount of cash, while its debt is not unsustainable in comparison to cash flow. The broadcaster has also managed to achieve growth over the past few years, with revenue growing from approximately £2.2bn in 2013 to around £3.3bn in 2019. This has been aided by a number of successful new shows. ITV shares are still trading at 2012 prices at the moment though.
In addition to strong fundamentals entering the crisis, ITV has also been sensible in preserving cash. This has included £160m in spending cuts and cutting the dividend. The cut dividend will help save the company around £300m in cash. In addition, with a price-to-earnings ratio of 7, ITV shares are undervalued. Strong fundamentals in the company should therefore ensure a rebound.
An improvement of fortunes in recent weeks is a major positive for the firm. This has included a filming restart in soaps such as Coronation Street and Emmerdale. Looking ahead to 2021, the return of ITV’s most successful shows such as Love Island should also boost profits. This is coupled with the return of the European Championships, providing another opportunity. ITV has also developed an online presence over the past few years. This includes both ITV Hub and Britbox (which was created in partnership with the BBC). As a subscription service, Britbox should have been especially useful in offsetting advertising losses over this period. With presence in the UK, Canada, and the US, Britbox is also an area for future growth.
In summary, I believe that the positives of ITV shares currently outweigh the negatives, especially at its current price. Of course, its future growth does rely on companies increasing their advertisement spending. But with consumer activity starting to increase once again, I believe that the lack of advertising revenue is a short-term problem. As such, it seems a good time to profit from these undervalued shares. I would therefore rate ITV shares as a buy for the long term.
Stuart Blair 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.