After reaching an all-time high in 2015, ITV (LSE: ITV) stock has been dropping like a stone. It’s lost 75% in value since then and has fallen out of the FTSE 100. Now I can pick up the shares for under 69p each. Sounds cheap. Am I buying?
The new Blockbuster?
Before I get into my reasons to buy, I want to look at that 75% fall in more detail. Because, on the surface, it sounds like a big discount. But I don’t want to make the common investing mistake of buying a stock on the way down. In other words, I don’t want to catch a falling knife.
And in ITV’s case, the stock’s decline is easy to explain. The fall closely followed the rise of streaming services like Netflix, Amazon Prime Video and Disney+. Today, around 58% of UK households are subscribed to at least one of those services.
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If that’s a sign of things to come, then this might not be a great buy. Legacy broadcasters might be on the way out. ITV could be the new Blockbuster. But actually, I think there’s more to the story here.
7.54% yield
Surprisingly, ITV’s revenues and earnings are growing. Last year, the firm brought in sales of £3.7bn, the highest it’s been for 10 years. Net income looked good too. Those rival streamers haven’t made a dent in the financials so far.
And these cash flows mean a tasty-looking dividend too. If I bought in at 69p a share, I’d be looking at a 7.54% annual yield. One more in the ‘buy’ column for me, then.
In terms of valuation, the company now trades at around six times earnings. That’s down from 18 times in 2014 and 22 times in 2015. This makes the stock sound cheap, but also tells me investors aren’t bullish looking ahead.
The Love Island effect
The future really is the crux here for me. Can ITV keep growing revenues in the face of a threat from big tech? Or would I be buying a stock about to go the way of the dodo?
I think a lot is going to hinge on the firm’s rival streaming service ITVx. This service was rebranded last year in a move away from Britbox and ITV Player, and I see a couple of reasons it could be a relevant player.
For one, ITV has a great track record of live events like sports or reality TV shows. I’m not sure Love Island would have the same success without the live broadcasting aspect to it. Equally, I think there will always be demand for UK-focused programming too.
All in all, I’d say the firm’s prospects are better than the 69p share price would suggest. I’d be tempted by the value here if I had spare cash.
