Winston Churchill once said that a pessimist sees the difficulty in every opportunity, while an optimist sees the opportunity in every difficulty.
With this in mind, how should you behave if you are considering an investment — or if you are already invested — in the shares of ITV (LSE:ITV), Royal Mail (LSE: RMG) and Vodafone (LSE: VOD)?
ITV Warning From Broker: “We Have Multiple Sellers”
This headline from a City trader caught my attention earlier today, but I haven’t changed my mind.
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ITV is under threat from rising competition and shifting customer preferences, and we should also blame a bad week for earnings at US media companies, with Walt Disney‘s results pointing to viewers who choose not to pay for traditional cable and satellite services, while abandoning expensive channel packages.
Very bad news: its flagship ESPN offering is losing traction.
Walt Disney stock plunged, but based on its relative valuation it’s still 20% more expensive than that of ITV — the British broadcaster is not Walt Disney, of course, but it remains a very solid company!
Its shares, down 4% today, trade on forward earnings multiples of between 18x and 17x for the next two years. This is not a particularly high valuation based on its projected growth rate (steady, at 10% a year), a core operating margin in the region 27%, rising earnings and dividends per share, and a strong net cash position.
For me, there’s only one call here — and that is a buy, in spite of a stock performance that already reads +27% this year. It’s not an easy market out there, true, but ITV is well placed to cope with a more challenging environment. According to Thomson Reuters, the average price from brokers stands at 286p, for an implied 5% upside, but it has been a catch-up game for more than a year now between the company and analysts, and I doubt it will be any different over the next couple of years.
Vodafone & Royal Mail: What’s There To Like?
In fairness, Royal Mail and Vodafone are less straightforward investment propositions — whose stock are unlikely to rise significantly for some time.
Vodafone’s debt pile could become problematic, its underlying margins are thin, and although its growth trajectory for organic service revenues has improved over the last few quarters, its growth rate remains very close to zero.
Its relative valuation is less easy to gauge based on net earnings multiples — at about 86x and 48x for 2015 and 2016, respectively — than on its adjusted operating cash flow multiples which, however, signal that its shares could be overvalued by at least 20% at 244p, where they currently trade.
I reiterate the view that its high dividend yield signals risk rather than opportunity. Hence, I’d be happy to give VOD a pass, while I am not too convinced about Royal Mail, either.
Its share price can be volatile even at the best of times, and its trading multiples — at 21x and 19x, based on net earnings for 2015 and 2016, respectively — are more likely to promise some capital losses than significant gains. Royal Mail isn’t growing, really, and it couldn’t be otherwise in this highly regulated sector, where today’s results from UK Mail –– whose stock is down 13% at the time of writing — clearly show the risk of investing in any of the traditional players.
“It is now clear that the near-term challenges and their impact on the current year’s performance are more significant than anticipated,” UK Mail said today.
Yes, Royal Mail could be a decent yield play, but should you really invest in a company whose earnings growth mainly comes from efficiency measures? Well, I don’t think so.
There’s small room for error at operating level, which could even jeopardize the company’s dividend policy, in my opinion.
