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Timing the right time to invest in a recovery is difficult. Pay TV (LSE:ITV) is a good example. The television group is making good progress with its plan to become a global content producer and the leading streaming service in the UK.
But ITV shares are still around 30% lower than they were at the start of 2022, just before chief executive Carolyn McCall set out her plans.
Why investors don't pay attention to ITV?
ITV is really moving forward. Revenue from its ITV Studios content business, which sells programmes to streaming platforms and other broadcasters, has risen from £1.76bn in 2021 to £2.17bn in 2023.
The company's digital streaming service, ITVX, is also growing. Digital advertising revenue has increased from £293m in 2021 to £415m last year.
The only problem is that the traditional TV advertising business isn’t doing so well. Advertising sales on regular free-to-air TV have fallen from £1.664bn in 2021 to £1.363bn in 2023. It’s true that last year saw a nasty drop in advertising. McCall said it was the worst downturn since 2009.
She is confident that things will improve, but the broader market is not yet convinced. Many investors believe that ITV is still too reliant on so-called linear television.
I think they are wrong
ITV's strategy seems sensible to me and I am particularly excited by the group's growing presence in the US content market, which I see as a huge opportunity for long-term growth.
At home, ITV is continuing to expand its streaming services, attracting users who do not want to watch traditional linear television. The company says it plans to reach £750m in digital revenue by 2026. I see no reason to doubt that.
The business remains fairly profitable. ITV's operating margin is around 14%. Adjusted earnings are expected to rise by around 18% to 9.2 pence in 2024.
The share price is hovering around 78p as I write this. These forecasts peg ITV's share price at eight times forecast earnings, with a well-supported 6% dividend yield.
I think it's too cheap for this business. City analysts have an average target price of around 95p for ITV. My calculations suggest a reasonable value of between 90p and 120p.
As a shareholder, I am hopeful that if ITV continues to deliver on its plans for the rest of this year, the stock could reward my patience.
Will 2024 be a turning point?
Markets hate uncertainty. Institutional investors may be wary of companies undergoing change.
But in my experience, success usually pays off at some point. If ITV can stabilise its advertising revenues this year and deliver an optimistic outlook for 2025, I think the cheap valuation on offer here could prove irresistible to investors.
Obviously, I have no idea what the ITV share price will be at the end of this year. No one can predict short-term share price movements. However, I think there are some good reasons to be confident about the outlook for ITV shares for the rest of this year.
