The ITV (LSE: ITV) share price has risen over 20% since mid-August, storming ahead of a near-flat FTSE 100. Fellow entertainment company, FTSE 250-listed Cineworld(LSE: CINE), is also up over the period, having gained 12%.
Is it time to buy? Here, I’ll give my views on the valuations and prospects of these two stocks.
Transformative acquisition
It’s been a long time since I last wrote about Cineworld. I’ve been on the sidelines, waiting to see how it shapes up following its mega $3.4bn acquisition of US cinema group Regal Entertainment in early 2018.
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The US is now Cineworld’s biggest market by far (75% of group revenue). Peak annual attendance this century in the US market was 1.6bn, as long ago as 2002. Audience numbers have declined steadily to 1.3bn in 2018, approaching 20% below the peak. Revenues over the same period are up in nominal terms, but down 17% on an inflation-adjusted basis.
On the face of it, to really thrive in the US, Cineworld needs an increasing share of a shrinking market. In its half-year results last month, it reported an 18.5% fall in Regal admissions and a 17.9% drop in revenue. This compared with a 9.4% decline in total US market revenue, and a 5.6% decline for US peer Cinemark.
So far, so underwhelming is my conclusion at this stage. At a share price of 238p (market cap £3.3bn) it trades at 9.6 times forecast earnings, with a prospective 5.6% dividend yield. However, I’d like to see evidence of improving performance in the US. And with it also having high net debt of $3.3bn, and gearing of 3.3 times EBITDA, I’m inclined to continue avoiding it for the time being.
Opportunities and possibilities
ITV is also on a cheap rating, despite the big rise in its share price over the last four weeks. At 125.75p (market cap £5.1bn) it trades at 9.8 times forecast earnings, with a prospective 6.4% dividend yield. In contrast to Cineworld, it has a strong balance sheet, with net debt of £1.1bn and gearing of 1.3 times EBITDA.
The current uncertainty in the UK economic and political environment, saw ITV post a 7% fall in external revenue in the first half of the year. Meanwhile, it continues to pursue its strategy of creating a stronger, more diversified business to enable it to take advantage of evolving viewing and advertising opportunities. Online revenues in the period increased 18%, and management is confident second-half revenues for its ITV Studios business will enable the studios to deliver a full-year increase of at least 5%.
Whatever the outcome of Brexit, the removal of uncertainty should benefit ITV, with advertisers better able to plan ahead. There may even be a significant one-off boost to this year’s revenue in the event government winds up spending £100m on advertising for a no-deal Brexit.
For the longer term, I think ITV is well positioned to deliver sustainable growth and attractive returns for investors as it becomes an increasingly digital entertainment company. The appeal of owning such a business and sterling’s current weakness may not be lost on overseas players. Witness US toy giant Hasbro‘s recently agreed takeover of UK film and content firm Entertainment One.
Seeing near-term possibilities and long-term prospects, I’d be happy to buy ITV shares today.
