The ITV (LSE: ITV) share price has halved this year. Ad revenues crashed in April and the group has been forced to cancel reality hit Love Island. Things are certainly difficult at the moment, but this situation won’t last forever.
As I’ll explain, I think there’s a good chance ITV shares could double from current levels.
Viewing up, revenue down
We already knew things were going to be tough for ITV in March and April. Advertisers have been cutting spending. The company has also been forced to shut down programme production at ITV Studios.
As my colleague Paul Summers reported on Wednesday, viewing figures remain strong, but revenue is down. The company has embarked on a new round of cost-cutting measures to preserve cash. These include £190m of spending cuts and £150m of delayed pension contributions. The dividend has also been suspended.
Luckily, the group’s balance sheet was in fairly good shape heading into the crisis. The firm has £100m of cash on hand and a further £829m of unused debt it can draw on if necessary.
Investors smell a potential recovery story and the ITV share price has risen by nearly 50% from the March low of 50p. Although I think it’s too soon to pop the champagne corks, I think ITV shares offer great value at current levels and recently topped up my own holding.
Why I’ve been buying ITV shares
How do you know when a share is really cheap? ITV shares currently trade on a price/earnings multiple of just six times 2019 profits. That’s certainly cheap, but what if the company’s future profitability is much lower?
After all, even before the coronavirus pandemic, ITV was adapting to rising online viewing and lower revenues from broadcast television. The group’s operating profit margin had fallen from 24% in 2014 to 16% in 2019. That’s a big drop — although 16% is still a pretty healthy figure.
I don’t know what the future holds. But the ITV share price has fallen by 70% over the last five years. The shares now trade on just seven times 2020 forecast earnings.
In my view, the shares are already priced for a much more modest future. If 2020 is the worst year for earnings — which seems possible to me — then only a small improvement would be needed to drive the stock higher.
Growth opportunities
As mentioned, ITV has been forced to cancel this summer’s series of Love Island, which is a big money-spinner for the group. However, I suspect that winter reality shows such as I’m A Celebrity… and X Factor will probably continue.
Looking ahead to 2021, delayed sporting events including the Tokyo Olympics and European Football Championships should provide opportunities.
The ITV Studios business will reopen at some point and resume programme production. Much of the firm’s content is sold to other broadcasters, reducing the group’s dependency on advertising revenue.
These elements of the business should be supported by continued online growth, through ITV Hub and the BritBox streaming service.
If market conditions gradually return to something like normality, I think the ITV share price could double over the next few years.