ITV (LSE: ITV) has to be one of the most hated stocks in the FTSE 100 today. Investors have been relentlessly selling shares in the company since mid-2015. In fact, since the end of April 2015, the stock has slumped nearly 50%, excluding dividends, underperforming the FTSE 100 by a staggering 56%.
However, I think investors have overreacted to the concerns surrounding the company and I’m going to explain why I believe the share price could be the buy of the decade.
Losing momentum
But first, I want to briefly cover the two main reasons why investors have been selling over the past four years. The rise of Netflix and other online streaming services has been spooking shareholders who think traditional broadcasters such as ITV can’t compete with the streaming giant’s multi-billion dollar annual budget for producing content. As consumers leave and turn towards streaming services, advertisers will reduce the amount of money they are willing to spend with ITV.
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Which brings me to the second reason why investors have been sellers, namely the bleak outlook for revenue growth. Bears argue that ITV will never be able to compete with companies like Netflix and Amazon and their tens of billions of dollars spend on content every year. As a result, advertisers will stop spending money with ITV, and its sales will collapse.
So far, these concerns haven’t materialised. City analysts have pencilled in earnings per share of 15p for 2018 up slightly from the figure of 14.6p reported for 2015. Granted, these figures do tell us that the company isn’t growing, but it’s not shrinking either.
Growth plans
Under new CEO Carolyn McCall, ITV is planning to ramp up its investment in its direct to consumer offering as well as its Studio business, both of which are registering faster growth than the traditional advertising side. Indeed, during the first six months of the group’s 2018 financial year, overall revenues increased 8%. Non-advertising revenues rose 14% and now make up approximately 60% of total sales.
I expect this trend to continue. I’m not expecting any fireworks from the advertising business considering the trends in the rest of the media industry, but I think ITV’s strengths, particularly its production arm, will be a crucial source of growth in the years ahead. As the company generated more than £350m in free cash flow from operations last year, before the payment of dividends, it has plenty of additional capital to reinvest for growth.
Deep discount
At present, the ITV share price is trading at a forward P/E of 8.9, compared to the company’s historical average of around 15. This tells me investors are expecting earnings per share to contract by approximately one-third in the near team.
Considering how resilient earnings have been over the past four years, I think it’s unlikely profits will slump by more than 30% in the next few years. With that being the case, I reckon the ITV share price is undervalued at current levels. What’s more, I think the stock will re-rate substantially when the company’s growth investments begin to pay off. That might take some time, but there’s a 6.1% dividend yield on offer for investors who are willing to wait.
