Why I think it’s time to be greedy with the ITV share price

The stock market has a habit of over-reacting to both good and bad news. In my view, the ITV (LSE: ITV) share price is a good example of this.

The television group’s stock has fallen by 50% since the start of 2016. Is this share price collapse reflected in the company’s performance? I don’t think so. Here’s how the group’s earnings have changed over the last few years:

Back in 2015, ITV shares were priced for growth, thanks to several years of rising profits. Now that picture has changed. The firm’s profits have stagnated for several years and are falling.

Behind this stock market action is a general fear that ITV will end up being unable to replace lost profits from traditional television advertising. That’s a valid concern. The group’s adjusted operating profit from broadcast and online, which includes advertising, fell by 7% last year.

Although profits from the ITV Studios production business remained stable, overall group profits fell.

Why I’d buy

There’s no doubt this business is changing. Chief executive Carolyn McCall plans to return the business to growth by focusing equally on three areas — advertising, content production and “direct consumer relationships”. I guess this last category includes online voting and competitions, plus a rumoured streaming service in the future.

This business is still delivering revenue growth. I’m fairly confident that Ms McCall, who previously ran easyJet, will be able to find a way of stabilising and improving the group’s profit margins.

If I’m right, then ITV shares could be too cheap to ignore at the moment. Trading on nine times 2019 forecast earnings and offering a 6.1% dividend yield, I see ITV as a top FTSE 100 buy.

A small-cap turnaround buy?

ITV isn’t the only company that’s working hard to adapt to changing conditions. Woking-based components manufacturer TT Electronics (LSE: TTG) is also transforming itself after the acquisition of Stadium Group last year.

The TT Electronics share price was 4% higher at the time of writing after the company said plans to cut costs by combining the two groups were being delivered faster than expected.

The firm also revealed new plans to restructure its UK manufacturing and warehousing operations and shift some production to China. According to the firm, this will help to cut costs and meet customer demand for cheaper parts.

Good and bad news?

Chief executive Richard Tyson appears to be delivering on the potential of the Stadium acquisition. In today’s statement Mr Tyson confirmed that 2018 trading was “positive” and that the group had a strong order book for 2019.

Analysts expect the group’s adjusted earnings to rise by 20% to 17.6p per share in 2019, putting TT shares on an attractive forecast P/E of 11, with a 3.5% yield. With the shares down by about 25% from last year’s highs, now could be a good time to buy more.

My only real concern is that the profitability of this business may always be limited by pricing pressure from customers. I’d want to do a bit more research into the firm’s competition before deciding whether to buy.