Shares in focus: Britain’s largest TV network

ITV has had its problems. But could the TV network's turnaround strategy work this time, and should you buy the shares? Phil Oakley investigates.

ITV is one to watch and buy, says Phil Oakley.

The business

ITV is the largest commercial television network in Britain. It has five television channels: ITV 1, ITV 2, ITV 3, ITV 4 and CITV (Children's ITV). These are broadcast free-to-air across various platforms. These channels make money by selling advertising slots and also from the sponsorship of TV programmes.

ITV receives similar income streams from its online business. This is centred on the ITV.com website and ITV Player, which offers television programmes on demand. ITV Studios makes programmes for ITV but also sells them to other countries. ITV had sales of £2.1bn in 2011.

The history

ITV began life in 1955 when it started broadcasting on channel three in the London area. By 1973 there were 15 regional ITV licences in Britain, with each licence run by a separate company. This remained the status quo until the early 1990s when Granada and Carlton set about buying up regional ITV firms. By 2001, they owned 11 of the 15 licences. In 2004, Granada and Carlton merged to form ITV plc, having previously co-operated on a number of ventures.

ITV has a chequered history. It has continually had to battle the ups and downs of the advertising market while coping with burdensome public-sector broadcasting obligations. It's also made a number of high-profile mistakes, such as its ITV Digital venture, which failed to create a credible pay-TV business, and its acquisition of the Friends Reunited website, which it later sold at a loss.

The growth of the internet and powerful rivals such as BSkyB and the BBC haven't helped matters. Several CEOs have tried to put ITV on a firmer footing during the last decade, but seemed to end up running hard to stand still. However, the current turnaround plan under the leadership of Adam Crozier does seem to be bearing fruit.

The chief executive

Crozier has been CEO since 2010. Before that he had held high-profile jobs at organisations including Saatchi & Saatchi, the Football Association and Royal Mail. His seven-year spell at Royal Mail was particularly eventful, with Crozier hailed by some for taking the business from losses to profits, and loathed by others for closing thousands of post offices and ending the second post and Sunday collections. Last year he was paid £1.5m.

Should you buy the shares?

ITV's profits are very sensitive to changes in advertising revenues there's no getting away from that. This is not something that is going to change quickly, but could ITV's turnaround strategy actually work this time? There are some promising signs. Underlying sales growth at ITV Studios has been building for the last couple of years as more of its programmes are sold overseas. It is also supplying more of ITV's own output, which should help profits. ITV also has a good line-up of entertainment, drama and sports programming that remains popular with British households. This means that it cannot be ignored by advertisers.

ITV's immense TV archive also offers significant profit potential. The growth of on-demand TV is well suited to monetising this asset, as recent deals with the likes of Netflix, LoveFilm and Sky demonstrate. A pay version of the ITV Player could also make money in this area. Throw in some further cost savings and ITV could deliver some decent profit growth going forward.

The company's pension fund deficit is a slight concern, but is being addressed. Otherwise it has impeccable finances with net cash on its balance sheet, having got rid of nearly £1bn of debt during the last three years. ITV now looks a lot less risky for investors, yet trades on a modest multiple of expected profits.

As long as the advertising market does not collapse, the company should keep producing good cash flows while remaining a significant broadcasting asset. We think the shares are worth buying.

The numbers

607_P14_ITV

Stockmarket code: ITV Share price: 87pMarket cap: £3.4bnNet assets (June 2012): £807mNet cash (June 2012): £92mP/e (current year estimate): 10.4 timesYield (prospective)2.7%

What the analysts say

Buy: 14Hold: 5Sell: 6Average price target: 90p

Directors' shareholdings

607_P12_ITV-DDs

A Crozier (CEO): 295,907I Griffiths (FD): 881,852A Norman (Chairman): 971,584

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020