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Trading: switch over to ITV

Broadcaster ITV is in solid shape and the market slump has left it looking far too cheap.

Still from Coronation Street © ITV
Production of ITV’s Coronation Street has been paused © ITV

Stockmarkets around the world plunged in mid-March, but they have rallied strongly over the past six weeks, with the FTSE All-Share up by around 20%. Nonetheless, there are still plenty of bargains around. One case in point is ITV (LSE: ITV)

It was trading at around 150p at the start of the year, started to decline in February, and then plunged by two-thirds to a low of 54p at the start of April. Even today it still trades at only 76p, down by around half from its pre-crisis peak.

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It’s clear that ITV will suffer some economic damage as a result of the lockdown. With no one buying anything, firms are drastically cutting back on the advertising spending that ITV relies on for around half its revenue. 

At the same time, the difficulty of social distancing means that production on several key shows, including popular soap operas such as Coronation Street and Emmerdale, has had to be halted. 

The postponement of football’s 2020 UEFA European Championships will also deprive ITV of advertising revenue. Given all this, it’s no surprise ITV has announced that it will not only be scrapping the 2019 dividend that was due, but it also won’t be paying one this year.

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Nevertheless, the current share price seems too low. It’s important not to overstate the impact of the crisis. The lockdown means that people are watching more television overall, leading to a record audience for the shows that are still airing. 

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And with the ban on large public gatherings set to continue for quite some time, the lack of alternatives means that this increase in viewership could persist for long after the lockdown itself is relaxed. Meanwhile, if rumoured plans to finish the Premier League behind closed doors and show at least some of the games on free-to-air TV come to fruition, then the effect of the lockdown on ITV would be softened further. 

What’s more, while there has been much talk of a long-term shift away from traditional television, it’s also important to remember that ITV has done well over the past few years, with revenues growing from £2.59bn in 2014 to £3.3bn in 2019, an annual growth rate of growth of around 5%. 

The group has also been investing in streaming services, ITV Hub and BritBox, in order to diversify its revenue base and fend off competition from rivals.

ITV is a highly profitable operator

ITV’s other fundamentals look impressive. Although margins have shrunk a bit recently, it has still used its assets efficiently, with a return on capital expenditure, a key gauge of profitability, of 23.8%. Its debt levels are also relatively low, with annual profits worth almost 30 times interest payments, and it has plenty of cash on hand. Despite this, it trades at only 5.7 times estimated 2021 earnings, which is an extremely low valuation for such a solid business.

With ITV’s share price already up by more than a quarter from its lows, the worst seems to be over. I therefore suggest you go long on ITV at £55 per 1p (compared with a minimum of £1 per 1p with IG). Given that the market has been extremely volatile, it makes sense to have a slightly looser stop loss, covering your position at 48p, which would give you a total downside of £1,540.

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