I’m convinced that ITV (LSE: ITV) is too cheap and it’s a buy now. That, really, sums up my opinion about the ITV share price, though I have a few specifics that cement the bullishness for me.
But first, ITV is set to be relegated from the FTSE 100 after its 2020 share price crash. The company now has a market capitalisation of only £2.65bn, and there’s at least a couple of dozen bigger than that in the FTSE 250. In the short term, I expect further share price weakness when the reshuffle happens.
ITV shares have lost more than half their value during the Covid-19 crisis. That’s after several years of weakness, and the price is down nearly 75% over the past five years. But why do I think the ITV share price is a strong buy right now?
ITV share price is lagging
Companies fall, and companies recover. And while a tough period can precipitate a very rapid price fall, any recovery in the shares can lag behind improvements in the outlook for the company. I think that’s happening now, and the lag is not a small one.
Advertising revenue fell in the early days of the pandemic crisis, and ITV shelved some of its production plans. But even by the end of the first half, things were looking up again. Advertisers were already flocking back since the government started easing the lockdown. And production was getting back on track.
I’m wary of investing in recovery situations before I’ve seen a company’s bottom line improving. But in this case, the improving outlook coupled with a very low ITV share price valuation is enough.
Serious undervaluation
ITV wasn’t able to provide any second-half guidance, which I think is wise given the uncertainty. But if the year comes in anywhere close to current forecasts, I’d say the shares look very cheap indeed. Analysts predict full-year earnings of around 8p per share. On today’s share price, that indicates a forward price-to-earnings multiple of only around eight.
What should that multiple be for ITV? It’s hard to say, especially as the FTSE 100 as a whole has fallen behind its long-term average of around 14. ITV, of course, won’t be in that index for much longer. But based on what I see as its long-term potential, I’d say ITV deserves to be rated at least as high as the index average. I think the ITV share price could easily double in the next five years.
Locking in big yields
ITV’s dividend has suffered, with capital preservation being the priority. But it traditionally generates strong cash flow, funding a progressive dividend policy. ITV had planned to pay a dividend of 8p per share for 2019, but the final portion of that was suspended.
The same 8p paid in 2018 provided a yield of 6.4%, after a number of years of above-inflation rises. That was a very attractive yield, and investors must be questioning whether it will return. But even the reduced 5.8p currently forecast for 2021 would yield almost 9%. And if we get back to 8p per share, we’d be looking at a yield of 12%.
That screams undervaluation to me, and I’d buy for medium-term growth and long-term dividends.