ITV (LSE: ITV) shares dived after the corporation reported its full-year results for 2021 earlier this week. The stock fell around 30% on Thursday and has continued to fall on Friday, despite the company reporting relatively robust figures.
A rebound in advertising revenue from the depths of the pandemic helped the company report a record £3.5bn in revenue. Meanwhile, pre-tax profits improved from £325m to £480m, and the board proposed a final dividend of 3.3p a share.
The payout for the whole year is 5p per share. Based on the current share price of 76p, that suggests the shares offer a yield of 6.6%.
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Investors spooked
It seems investors were spooked into selling ITV shares by the firm’s plans to increase its spending on content production. ITV said it planned to invest £1.23bn in programmes this year, up from an initial figure of £1.16bn. It plans to spend a further £1.35bn next year.
This is all part of the firm’s plan to at least double its digital revenues to £750m by 2026.
City analysts believe this spending shows the company is struggling to compete with American streaming giants. This has been a long-standing concern among investors. ITV is a fraction of the size of its American peers, and it has always been struggling to draw eyeballs away from these content providers.
However, while this is a very real concern, I think it is notable that the business has managed to hold its own. The streaming attack is not a new phenomenon. The company has been fighting off its American competitors for much of the past decade. The fact that the corporation has just reported record revenues for 2021 suggests it is managing to navigate this challenge and still grow.
ITV shares valuation
With spending set to increase over the next year, City analysts have revised down their profit expectations for the company. They are now forecasting a net profit of around £600m for 2022, or earnings per share of 15.1. Based on this projection, the stock is trading at a forward price-to-earnings (P/E) multiple of 5.3. This has become one of those rare situations where the yield on a stock exceeds its valuation.
Based on all of the above, I am still bullish on the outlook for ITV shares. Yes, the company is facing increasing competition and is having to spend more to keep consumers watching. But even after factoring this risk into account, and the increased spending required the keep on top of the competition, the stock looks dirt cheap.
I think there are two potential outcomes for the enterprise over the next five years. In the worst-case scenario, it will lose market share to the streaming giants, revenues will collapse, and so will the value of the company’s shares.
On the other hand, if the firm continues to maintain its position in the market, it could become an attractive takeover target, although there is no guarantee a competitor will move in to buy the business.
