ITV (LSE: ITV) has been out of favour for years, but in the second half of 2019 it was starting to win investors back. Then, of course, Covid-19 struck, and the ITV share price went into a tailspin. So far in 2020, it’s down 60%. I think it’s now one of the most undervalued shares in the whole of the FTSE 100.
Unless the shares perk up some time soon, ITV won’t be in the FTSE 100 for long, mind. With a market-cap now under £2.5bn, it’s the most lowly valued in the index. And there are many FTSE 250 stocks with richer valuations just waiting to take its place come the next reshuffle.
In the first half of the year, ITV suffered from the biggest fall in advertising in its 65-year history. Advertising revenues shrank by a massive 43% in the second quarter, and that led to an overall revenue decline of 17%. Oh, and a halving in operating profit and 53% lopped off earnings per share. Perhaps surprisingly, the ITV share price picked up a little in response — maybe investors were fearing worse.
ITV has joined the growing club of companies that have suspended or reduced their dividends to try to support their balance sheets. The board “decided not to pay an interim dividend in light of continued economic uncertainty.”
That’s understandable, and I’d say definitely the right thing to do at this point. But it does add to the horribly negative market sentiment facing the company right now.
ITV share price valuation.
The current price puts ITV shares on a trailing P/E, on 2019 earnings, of just 4.5. The expected slump in earnings for the current year would bring that back up to about 7.5 — about half the FTSE 100’s long-term average. And any earnings recovery in 2021 would send it spinning back down again.
But we’re already seeing the economy spiking back up more quickly than expected. And chief executive Carolyn McCall has already spoken of “productions restarting and advertisers returning.“
Today’s ITV share price looks to me like the market is pricing the company to go bust. And many firms are facing that exact risk right now and deserve to be shunned. But I really don’t see ITV as being among them. In fact, ITV’s balance sheet looks like it’s getting stronger, not weaker.
Healthy balance sheet
Net debt stood at £1,195m at 30 June 2019. By 31 December, that had fallen to £893m. And by 30 June this year, bang in the middle of the pandemic downturn, ITV’s debt was down even further, to £783m.
Even with first-half earnings falling so hard, ITV can still boast a net debt to adjusted EBITDA ratio of only 1.3x. That’s doesn’t look like a threat to the company’s viability at all. Especially not with total liquidity of £1,214m at 30 June.
I see an underlying business that’s solid, and I’m convinced the ITV share price can climb strongly in the next couple of years. My Motley Fool colleague Roland Head sees ITV as the kind of stock Warren Buffett would buy. I think so too.
