Commercial broadcaster ITV (LSE:ITV) has slumped in value as worries over advertising revenues grow. The FTSE 250 firm’s share price fell by mid-single digits on Thursday following its latest trading statement. The company is now trading at a 23% discount from the year’s high of 96.6p struck in February.
But although ITV has its fair share of problems, I’ll be looking to add it to my portfolio when I have spare cash to invest.
The badness is baked in
In its latest market update on Thursday, ITV announced a 10% fall in advertising revenues in the first quarter. And it warned that sales are likely to fall 12% in the current three-month period. Group revenues dropped 7% because of pressures in the ad market.
Marketing budgets are among the first things companies slash when times get tough. So a bleak outlook for the UK economy bodes badly for ITV through the rest of 2023, at least.
Yet I believe this pressure is baked into the broadcaster’s rock-bottom share price. At 74p per share, it trades on a forward price-to-earnings (P/E) ratio of just 8.3 times.
Two reasons I’d buy ITV shares
In fact, I think this represents exceptional value given the company’s exceptional long-term prospects. First of all, I’m encouraged by the huge splash its ITVX streaming service continues to make despite fierce competition from Netflix and other US industry giants.
Total digital revenues jumped 29% in the opening quarter while streaming hours were up 49%. ITV has a great track record of succeeding in the streaming space and is investing heavily in technology and programming to keep the momentum going.
I’m also attracted to ITV because of the potential for huge growth at its production arm. Popular shows like Love Island, I’m A Celebrity… and The Bay illustrate the exceptional pedigree the business has in programme making. And as the streaming arena continues to expand, demand for ITV Studios’ award-winning content is likely to soar.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, says ITV Studios “is sitting on a well of future demand, thanks to the huge swell in appetite for content from other providers.” The FTSE 250 business has targeted average organic growth here of “at least” 5% a year through to 2026.
A top dividend share
These positives mean ITV is predicted to recover sharply from a forecast 33% earnings drop this year. Bottom-line rises of 11% and 14% are predicted for 2024 and 2025 respectively.
Pleasingly, these bright earnings estimates mean brokers are also expecting solid dividend growth over the period. So ITV’s bumper 6.6% yield for 2023 moves to an even more impressive 6.8% for next year and to 7.3% for 2025.
All things considered, I believe ITV could deliver market-beating investor returns over the next decade.
