The ITV share price has jumped! Here’s what I’d do

Since the beginning of the year, the ITV (LSE: ITV) share price has jumped. The stock is up 10% since the the first day of January. Its performance over the past six months and 12 months is even more impressive. Over these periods, shares in the free-to-air broadcaster have increased by 85% and 15% respectively. 

This performance only gives a snapshot of the company’s investor returns. Over the past five years, excluding dividends paid to investors, the stock has lost more than 50%. As ITV’s market capitalisation has dwindled, it has also been booted out of the FTSE 100.

However, past performance should never be used as a guide to future potential. And with that in mind, I’ve recently been reviewing the business to see if it could be worth adding the ITV share price to my portfolio as the company’s outlook improves. 

Improving outlook 

Shares in ITV plunged to a multi-year low in March of last year. It looked as if the company would suffer a significant decline in revenues due to the pandemic. As advertisers pulled their spending, and the organisation was forced to mothball its production business, revenues plummeted and it eliminated its dividend. As a result, investors deserted the group.

But by the end of the year, these headwinds had vanished. In its trading update for the nine months to the end of September 2020, ITV reported total external revenue had declined 16% year-on-year, but growth had returned in the fourth quarter. 

This seems to explain some of the recent performance of the ITV share price. With the firm’s outlook improving, investors have returned to the stock.

At this point, it’s unclear if this trend will continue. ITV has reported an increase in total viewing over the past 12 months, but so have other streaming services. As most people have been stuck at home since the beginning of the pandemic, that makes sense. What’s less certain is what happens next. For example, will these viewers remain with ITV after the pandemic or, with less time for TV, will they focus on other entertainment platforms? 

ITV share price: uncertainty 

At this point, that’s impossible to answer. This is currently the most significant risk facing the business. Streaming platforms have invested tens of billions of dollars in new content over the past 12 months. ITV can’t compete with this level of spending.

The group has earmarked additional spending for its online service and BritBox offer. These figures pale in comparison to spending by the online streaming giants. 

Still, City analysts are expecting the group to report earnings of around 9.4p per share for 2020, rising to 10.7p for 2021. Based on these projections, the stock is trading at a multiple of 10.9 times forward earnings, compared to the media sector average of 16.

While these are just forecasts and there’s no guarantee the business will hit these earnings targets, I think they highlight its potential for the next 12 months.

As such, I’d buy the stock for my portfolio today, despite the risks and challenges the business may face in the near term.