The market gave a warm response to a Q3 trading update from ITV (LSE: ITV) today. The shares moved 3% higher in early deals to 140p, before easing back to trade modestly up on yesterday’s close of 136p. This continues a strong run from a multi-year low of little more than 100p during the summer, but still leaves the stock far below its 2015 high of around 280p.
With 100% upside for investors at today’s price, should the shares return to that high, let me tell you about the FTSE 100 firm’s update, and why I think now is a great time to buy the stock for the long term.
Strategy
Chief executive Carolyn McCall said: “ITV’s overall performance for the first nine months of 2019 was as we expected, and although the economic environment continues to be uncertain, we are making good progress in executing our strategy.” This strategy is to build “a digitally led media and entertainment company to create a stronger, more diversified and structurally sound business.”
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I see plenty to be encouraged by in today’s update. Total advertising revenue was up 1% in Q3, at the top end of company guidance. Management expects Q4 to be flat to up 1%, and, as a result, to be down around 2% across the full year. I see this as a creditable performance, given the aforementioned backdrop of the uncertain economic environment.
Looking to the longer term, and the building of a digitall-led media and entertainment business, while total advertising revenue was down 3% for the first nine months, online revenues continued to grow strongly, up 23%.
Meanwhile, the company’s content arm, ITV Studios, posted revenue growth of 1% for the first nine months. Management also said it’s confident that, due to a very strong second half delivery schedule, the business will deliver full-year revenue growth of at least 5% at a 14-16% margin.
Lots of positives
There are plenty of other positives. ITV Hub has reached its target of 30m registered users two years ahead of target. BritBox, its streaming collaboration with the BBC, has launched, with management “encouraged by the positive feedback received on the service so far.”
The company confirmed development of its addressable advertising platform is on track for a roll out to media agencies early next year. And management also said: “Our cost programme is on track to deliver £20m of savings this year and £55m to £60m over the four years to 2022.”
Turning to the valuation of the business, there are positives on this score too. City analysts expect earnings per share of 13p for the year. At the current share price, this gives an undemanding price-to-earnings (P/E) ratio of 10.5. And with management reiterating guidance of “at least an 8p dividend for 2019,” there’s also a chunky 5.9% yield.
High investment returns
All in all, with the strong ITV Studios business becoming an increasing force in the group (43% of latest revenue), and non-advertising revenue surpassing advertising revenue in recent years, I think management is doing a good of building that “digitally led media and entertainment company,” and creating “a stronger, more diversified and structurally sound business.”
Combine this with the low P/E and generous dividend yield, and I see the stock having good prospects of delivering high investment returns over the medium term. I reckon buyers today could double their money in due course.
