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As a shareholder in broadcaster ITV (LSE: ITV), I continue to wonder whether the shares really are the bargain that they look to me. With the ITV share price well below a pound and a price-to-earnings ratio of under eight, things look cheap for a well-known television company with a large production arm.
But is the ITV share price really a bargain — and if so, ought I to buy now while it is still in pennies?
The shares have been well above a pound each as recently as last year. In 2015, the ITV share price reached over £2.60. That certainly seems a long time ago now!
The fall since last year as well as the longer-term decline both boil down to the same issue in my view. That is the rise of digital rivals such as Netflix.
Such digital rivals are a threat to the massive advertising revenues that have long been at the heart of ITV’s business. On top of that, the rise of digital platforms has led to changes in viewing patterns that make ITV’s traditional television offering seem increasingly irrelevant to large numbers of potential viewers.
Last year the company unveiled a plan to revamp its digital offering. But rather than reassuring the City as intended, this did the opposite. Fears of the costs involved and their impact on profitability sent the shares crashing below a pound each. They have stayed there ever since.
Potential for growth
I think that reaction was strongly overdone, however, which is why I started buying ITV shares last year.
The share price has already recovered by 40% since September.
Looking at last year’s business performance, the part of the ITV business that includes advertising and digital platforms saw revenues slide, but only by 1%.
Within that figure, digital advertising revenues grew by 17%. This suggests to me that, on current evidence at least, the company’s digital strategy is broadly working in neutralising the impact of advertising lost in the traditional business.
That is a defensive strategy in a changing industry and I would prefer to see the main business return to growth. But the company’s key digital platform is still bedding in and I do see substantial room for future growth.
Meanwhile, the studios business saw revenues increase 17% last year.
I like this part of the ITV investment case because it does not rely on ITV’s own audience. As the business has studios and production facilities, renting them out to third parties like Netflix makes sense to me – and is a booming business.
That might not last. If the streaming boom winds down, the studios business could see revenues fall.
Meanwhile, a weak economy poses an ongoing risks to advertising revenues. That could hurt profits at ITV.
Last year, though, the company reported earnings per share of 10.7p and paid an annual dividend of 5p per share.
I see deep value at the current ITV share price well south of a pound. I do not know whether the shares will continue to trade for pennies. I see them as undervalued, but they seem to suffer from some ongoing investor scepticism about the company’s ability to deliver.
Nonetheless, if I have spare cash to invest in May, I plan to buy more shares.