Television group ITV (LSE: ITV) has had a tough few years. But the ITV share price has doubled from the lows of 50p seen during the depths of this year’s crash. I reckon the shares could double again in 2021. Here’s why…
Two good reasons
I can see two good reasons to be optimistic about the outlook for this well-known firm. Firstly, ITV appears to be making good progress with its operations. The coronavirus pandemic brought a lot of television and film production to a halt in the spring. But the company says 85% of the productions that were stopped are now back in progress, or complete.
ITV Studios generated nearly 40% of the group’s profits last year. This division produces television for many other broadcasters, including some of the big streaming services. I expect Studios’ contribution to continue growing.
The group’s online operations are also making a bigger contribution. The ITV Hub online player now has 32m registered users. With 27.6m households in the UK, this means the average household has more than one account.
One reason for the ITV’s share price performance is that selling ads online hasn’t been as profitable as broadcast advertising. This remains a challenge. But the firm says advert sales during the final quarter of 2020 are expected to be higher than during the same period last year.
ITV has also recently completed the launch of a new advertising platform for its on-demand services. I expect this to improve profitability of online advertising over the next year or two.
How I think the ITV share price could double
A lot of shares that have bounced back strongly this year now look a bit pricey to me. ITV doesn’t. The shares still trade on just 10 times 2021 forecast earnings, with a potential dividend yield of almost 5%. I think that’s cheap for a company that’s historically generated high profit margins and doesn’t have too much debt.
In my view, the market’s still waiting to see if ITV CEO Carolyn McCall can pull off a turnaround. If the business returns to growth next year, I expect investors will become more optimistic.
Before Covid-19, analysts expected ITV to report earnings of about 14p per share in 2021. If the company can return to this level in 2022, I think we could easily see the shares trading on a multiple of around 15 times earnings. That would give ITV a share price of around 200p — almost double today’s level.
What could go wrong?
There are no guarantees. ITV could still turn out to be a dinosaur that fails to adapt to changing technology. Personally, I think this is unlikely. This broadcaster is deeply embedded in UK popular culture, with over 20% of all viewing.
Events this year have disrupted the group’s operations and made it difficult to measure the group’s underlying performance. I think 2021 will be much stronger and will see the stock attract new buyers.
I’m continuing to hold my ITV shares and would be happy to buy more at current levels.
